The mortgage market has given back a portion of recent appreciations--in both price and relative value (yield spread). Multiple lenders have re-priced for the worse...some recalls hit inboxes before the initial releases were even downloaded to xls workbooks.

A lack of new loan supply and slow trading conditions helped mortgage valuations yesterday. A lack of new loan supply and slow trading conditions are not helping mortgage valuations today. This price action implies fast money is at work in mortgage-land. Profit taking and "position squaring"  are a constant reminder of defensive day-trading biases. This is to be expected ahead of market moving events....

The FN 4.5 is +0-01 at 100-08 yielding 4.477%. The secondary market current coupon is 4.472%. The current coupon is now 64.2bps over the 10yr TSY yield and 68.8bps over the 10yr swap rate. This is the widest I've marked the CC against the UST10YR note today.

All that said. The positive price progress we enjoyed yesterday is still intact. No harm done.

On another positive note...

The 2s/10s portion of the yield curve is 4 basis points flatter today. Now at 277bps. 

I view this as the "rate sheet influential" end of the yield curve playing catch up with yields in the front of the benchmark TSY curve. The 2s/10s yield curve has, for the most part, held near record high steepness levels for past 12 days. Now we play catch up (and consider adding position?)

Shorter maturity benchmark TSY have recently benefited from relaxed inflation anxieties (CPI tomorrow to confirm) and reduced FOMC rate hike fears.  Fed Chairman Ben Bernanke gets an opportunity to confirm these sentiments tomorrow morning when he addresses the Congressional Joint Economic Committee.

This is important for a few reasons. One being we don't need to give oil any reason to rally as higher energy costs would reduce room on consumer balance sheets for mortgage payments. Second, if the Fed Chairman Bernanke can continue to walk the "inflation/deflation" monetary policy tightrope while managing to not spook the financial markets, he might be able to indirectly help move mortgage rates a few bps lower.

If Ben's tight rope walk is balanced and the short-end of the yield curve rallies as a result, it sure would make it a heck of a lot easier for the 10 year note to test 3.71%...the "3.57 to 3.85 range" midpoint. Production MBS coupons wouldn't keep up, but the secondary market current coupon yield would still fall a few bps. 

2s gotta break through resistance between 1.02% and 0.99% to pave the way for 10s though. READ MORE ABOUT THE SHAPE OF THE YIELD CURVE AND MORTGAGE RATES

Expect Bernanke to reiterate that resource slack and low unit-labor costs are keeping core-inflation at bay. 


In a sense, the market now views Greece in the same regard as the village viewed "The Boy Who Cried Wolf". It's not to say that Greece isn't facing hidden refinancing troubles, it's more to imply that their problems have been dragged through the dirt enough times to make it hard to decipher fact from fiction ....or rhetoric from rescue.

The market is numb to Greece. (like stocks are numb to volatility).