Would you believe that, as far as traders are concerned, MBS have recovered ALL previous losses in terms of "relative value."  We on the other hand are only getting about half the losses back in terms of MBS prices.  But prices themselves don't matter much to traders compared to how far away those prices are from other benchmarks.  So, compared to tsy's, MBS are as healthy as they've been so far this year.  The chart below illustrates the entry into Wednesday AM's "tights" (lowest point on left side of chart).  We can then see the blowout that brought spreads significantly wider by the end of Wednesday, followed by a very choppy day yesterday.  Beginning yesterday afternoon, spreads have tightened all the way back down to Wednesday AM's levels, the lowest in the last 12 months.  You'll notice that soon after we crossed those historic tights that MBS widened in spread indicating that they lost some ground vs. treasuries.  These spread levels are what have capped our rally so far today.

 This spread situation can be either a good or a bad thing for the originator.  The most salient "bad" factor is that spreads can only go so tight before they can no longer improve relative to tsy's.  Once that happens, movements in tsy's would be extremely important, as MBS outperforming tsy's on "up" days would be less likely.  On a positive note, it's encouraging to see just how quickly spreads returned to these lows.  Similar "up then down" jolts have occurred recently when spreads pushed to tight levels and this return to tights will look very similar once the chart is blown up to annual size.  So at least the trend in spread continues.  Furthermore, there is, in fact, room for spreads to move a bit tighter, and moving below the tights this AM lends credence there, but oh so gradual would such an occurrence be.  The final positive is a simple intraday factor.  MBS have been able to hang onto a rather firm ledge after the initial pull-back created by the tightness this AM.  One of the reasons is the upward movement (wider) you see in the last portion of the chart.  As this line moves up, think of it as more potential value for traders being added to the MBS picture.  Because Tsy yields have been dropping all day, the spread has been able to widen without damaging MBS price.  Should fixed income experience some selling this afternoon, it's likely MBS would tighten that spread back down leaving us with fewer losses than tsy's in late day trading.  In plainer terms, rallying tsy's have given us a bit a spread cushion which, according to earlier spread levels, could tighten enough to prevent major damage to MBS price this afternoon.  All that said, we never read too much into Friday afternoon trading, especially after the book close at 3pm.  Still....  The more green the better, right?  To that end, here's a shot of the aformentioned "ledge."  MBS seem very hesitant to go below 100-13.  The recurrence of the bounce suggests this is technically significant.  Take a look:

Good stuff indeed, and just the kind of stability we like to see.  Now if only it was back in the range it used to be....  Speaking of those "used to be's," what's the net effect of today's face-melter?  As has been discussed, we're about half way back to the highs of the year.  Importantly, we have crested the "modal lows" (the most frequently occurring closing price in the low side of a range) which are incidentally very near our intraday support.  In plainer terms, MBS fell off a mountain, through the ground, and down to some unsavory location well below the surface.  As of this afternoon, we're back above the surface, and although it doesn't look like a mountaineering expedition is in the cards for today, at least we're not heading back "down below," (at least for today!  <cue maniacal laughter>).  Here's the long term daily close price chart to show the big picture.  Although this has some retracement lines on it, we'll take a more in depth look at some technical analysis in the closing post.

Much more to discuss in today's closing post.  For now, the gameplan should be to assess gains before lock cut-off.  If you couldn't handle Wednesday, GUT-FLOP and lock the ones you need to if the gains have been passed on.  Aside from that, there are fundamental data reasons to suggest a continued float at these levels.  We'll discuss those at the close.  And even though things can always go either way, and even though we're only just regaining the base of the mountain, today's "rally time" has been most "excellent" compared to a sharp stick in the eye.  Many of us could not have asked for more, and considering the spread chart's suggestion that there isn't much more to be had before tsy yields come down, we're inclined to say "Rally On!"