Come on...seriously, did I even come close to fooling you?

I hope not. The Fed is gone people. The Fed is gone. (tearing up over here)


Don't hold your breath for an extension of the MBS program. The Fed must let the market function on its own, but closely evaluate the effects of their exit. If the labor market is unable to create new jobs and housing takes a nose dive, then it is possible we see the Fed restart the MBS purchase program at a later date. READ MORE

Welcome to day 1 without the flow balancing supportive influence of the Federal Reserve's backstop bid. The effects are already obvious.

The FN 4.5 went out at its low price of the day...and widest yield spread of the day as well.

While the 10 year TSY note was +0-06 at 98-09 yielding 3.833%, down 2.5 basis points in yield on the day....the FN 4.5 was -0-03 at 100-06 yielding 4.484%, up 1.1 basis points. The secondary market current coupon rose from 4.463 to 4.48%. 

Plain and Simple: MBS Current Coupon yield spreads widened vs. benchmark yields yesterday! I wrote a whole post discussing why this is important. If you're looking to keep track of the effects of the Fed's exit on mortgage rates, its a good one to add to your knowledge base. HERE IT IS!

We're off life support, now what? Life goes on we focus on the fundamentals of the To Be Announced (TBA) MBS market

Weekly Jobless Claims data has been released. New claims for unemployment insurance benefits fell 6,000 to 439,000 in the week ending March 27, 2010, this is the third consecutive week initial jobless claims moved lower.  Economists were expecting a decline to 440,000 initial claims, so this was a slightly bigger improvement than expected...but well within the range of forecasts. The labor department called the data "fairly uneventful".

Continued claims declined by 6,000, from 4,668,000 to 4,662,000. Yay.

More importantly, extended/emergency benefits rose to 6.031 million, an increase of 263,999 from 5.767 million in the previous week. This is below the record of 6.044 million, set in the week ending Feb.27, but uncomfortably way too high. This tells us people are finding it difficult to land a job. This data was not recorded in the week the NFP survey was taken, so it wont have any bearing on tomorrow's Employment Situation Report.

Before the data Treasuries were a bit weaker (in low volume) thanks to gains in overseas equities. In Japan, the Tankan survey of large manufacturers rose to -14 in Q1 from -24 previously, as expected, while the non-manufacturing index increased from -22 to -14, beating the consensus by 4 points.  This helped the NIKKEI rise 1.39%.  In China, the manufacturing PMI jumped from 52.0 to 55.1 in March, just beating expectations for 55.0. This helped the SHANGHAI Composite rise 1.23%. In Hong Kong, the HANG SENG was up 1.40%, in Paris the CAC is up 1.42%, in Frankfurt the DAX is up 1.12%, and in London the FTSE is up 0.8%.

After the data, the 3.625 coupon bearing 10 year TSY note is -0-06 at 98-03 yielding 3.859%.A test of 3.88% is possible today....

I'm hesitant to make much of the movement though. Trading volume is extremely low, and yesterday's high volume levels of support are holding up in the futures market. Notice where 10yr futures contract prices bounced this morning....right where the majority of buy tickets accumulated yesterday. It's going to take more than an "as expected" jobless claims number to break that level of position support. (More like a strong NFP number)

While the benchmark TSY market is apathetically "so so" today, the scene is not pretty in "rate sheet influential" mortgage-land.  The FN 4.5 is -0-10 at 99-28 yielding 4.521%. By my scorecard, the secondary market current coupon is 4.532%. This puts the secondary market current coupon another 3 basis points wider vs. the 10yr TSY note and the 10yr swap. This is the "feeling out" process we expected to see from dealers when the Fed finished the MBS Purchase Program. See comments above about yield spreads.

While I see underlying position support in our benchmark guidance giver 10yr TSY note, at this point, watching the 10 yr TSY note isn't  providing the most accurate picture of where mortgage rates might head in the next few days (with exception to the direction 10s take after NFP tomorrow). As was noted yesterday, we are watching and waiting for the MBS market to find a risk/reward yield spread equilibrium now that the Fed has completed $1.25 trillion in agency MBS purchases.  This could take days, it could take weeks. It all depends on how much new supply is offered by originators, prepayment reinvestments,  and at what yield spread buyers will see as cheap enough (wide) to buy.