Although prices of MBS remain at rich levels...market participants are not finding much reason to let MBS/TSY yield spreads move noticeably wider...SO MBS PRICES HAVE PUSHED HIGHER AND HIGHER while the yield curve bounces around a defensive trading range....

Here is what I mean by RICH...in one day we have annihilated our previous trend channel's topside resistance. Not sure what changed overnight that would bring about such an event...perhaps this a reason to worry that today's rally isnt a long term trend? Its a possibility...but we will continue to take our DIRECTIONAL GUIDANCE from TSYs and the "stock lever"....

FN30________________________________

FN 4.0 -------->>>> +0-18  to  100-20  from 100-02

FN 4.5 -------->>>> +0-10  to 102-05  from 101-27

FN 5.0 -------->>>> +0-07  to 103-07  from 103-00

FN 5.5 -------->>>> +0-02  to 103-26  from 103-24

FN 6.0 -------->>>> +0-05  to 104-22  from 104-17

GN30________________________________ 

GN 4.0 -------->>>> +0-17  to 100-25  from 100-08

GN 4.5 -------->>>> +0-13  to 102-16  from 102-03

GN 5.0 -------->>>> +0-07  to 103-26  from 103-19

GN 5.5 -------->>>> +0-04  to 104-04  from 104-00

GN 6.0 -------->>>> +0-04  to 104-15  from 104-11

The FN 4.0 has been hovering near its intraday highs for the past hour or so while the shorter (duration) side of the stack continues to trade sideways. As prices of MBS move higher and "reprices for the better" slowly enter inboxes...we are beginning to wonder if mortgage bankers will add some volatility to the interest rate environment by placing hedge trades in an effort to protect their pipelines from fall out risk.

This hedge usually involves buying TSY futures or by paying fixed in an interest rate swap agreement. On the flip side...it is a short term trading environmentwhich implies"Flight to Quality" bids may unwind from the yield curve in the event stocks find new technical (as in the right price) optimism. In that event MBS prices would cheapen up (sell off and lose maybe all of today's gains) and mortgage  bankers wouldnt need to worry about placing a "fall out risk" hedge.

Perhaps this a reason why "big boy" (block trading) lenders are reluctant to pass through lower borrowing costs.....