Good Morning. Happy Monday to you.

The home buyer tax credit is now officially EXPIRED. Did you see a tax credit related pick up in business over the weekend?

Financial markets were roiled by a healthy dose of headline news and unexpected events last week.  A mixture of flight to quality allocations and technically supportive trend channels helped rate sheet influential Treasuries and mortgage-backs rally to price levels not seen since the Fed exited the mortgage market in late March.  Trading flows were generally inhibited by a Senatorial inquisition (witch hunt) of Goldman Sachs and the normal pre-FOMC position freeze, but developing events in Greece (and others) did serve to shift asset allocations in favor of risk-free government debt.  As a result, mortgage rates ground out modest gains, albeit at a slower pace than benchmark guidance givers. Also adding a layer of confusion to an already muddled mess was $129 billion in TSY debt supply, which was taken down in a progressively more aggressive fashion as the week played out.

Perhaps one could point toward nervous investor sentiments as a source of strength in the bond market, but its hard to overlook the falling value of European currency and its relation to firm demand at auctions.

Plain and Simple: foreign investors likely continued to shift reserve funds into dollar denominated assets last week as the economic environment in Europe evolves. This likely boosted demand at Treasury auctions.

As would be expected when auction supply is concentrated in 2s and 5s, the short end of the yield curve was outperformed by the long end and the entire curve flattened. This "flattener" started on April 21...when the Treasury announced auction supply terms.  READ MORE ABOUT THE SHAPE OF THE YIELD CURVE

Over the weekend,  Greece reached a €110 billion (about $145 billion) financing package agreement with the IMF, the EU, and the European Central Bank (ECB) on a program to stabilize its economy, become more competitive, and restore market confidence.

The deal includes budget cuts, a three year freeze on wages and pensions, and tax increases. IMF support will be provided under a three-year €30 billion (about $40 billion) Stand-By Arrangement (SBA)—the IMF’s standard lending instrument. In addition, euro area members have pledged a total of €80 billion (about $105 billion) in bilateral loans to support Greece’s effort to get its economy back on track.

The IMF Executive Board is expected to review the package, agreed at mission level, under its fast-track procedures. It is expected to go to the Board for approval within the week. HERE is the  IMF release.

This "event" was expected (but still not final), the following event was not....

Police in New York city defused a car bomb in Times Square on Saturday night. While the bomb was not strong enough to damage the structural integrity of surrounding buildings, human casualties would have been sizable if the device had detonated.  The Pakistani Taliban claimed responsibility for the attempted car bomb attack.  I would like to share my real feelings on these actions but I won't because my mom always says "If you don't have something nice to say, don't say it at all".

I think this response says enough:

The week ahead is filled with manufacturing and labor market data with the official Employment Situation Report to be released on Friday morning. On top of key economic releases, we get a Treasury debt supply announcement on Wednesday morning (3s/10s/30s) and the April MBS prepayment rate factors report on Thursday night. I suppose we shouldn't overlook new political and fiscal tapebombs either.  The trading atmosphere is ripe for knee-jerk reactions.


Stocks are higher to start the week but still below a key pivot point. The S&P is +0.64% at 1194.33

The 10 year TSY note is giving back the positive progress seen on Friday. The 3.625% coupon bearing 10yr note is -0-10 at 99-12 yielding 3.699%. Bullish target: 3.68%. Bearish target: 3.71% with a more intense test of buyer sentiment at 3.75%

The FN 4.5 is -0-10 at 100-18 yielding 4.439%. The secondary market current coupon is 4.416%. The CC yield is 71.7 bps over the 10yr TSY note and 70.9bps over the 10 year interest rate swap. Yield spreads are slightly tighter as benchmark yields backup. High dollar prices are a loan originator's friend at the moment but real money MBS investors don't like when production MBS coupon prices tick deeper into the 100 handle. However this is a normally SUPPORTIVE WEEK for "rate sheet influential" MBS, so even TSYs reverse course and yields head higher, mortgage rates will have some room to absorb the uptick (if lenders want).

Unfortunately, if the chart below could speak it would say: RATE SHEETS WILL BE WORSE TODAY




Japan and London are out on holiday so trading flows may be tempered by a lack of broad based conviction.  This implies chopatility is highly likely. If you didn't read MG's last post, it goes deeper into lock/float considerations. HERE is it. From my point of view, I would be watching the market very closely...looking to lock up whatever loans I could while price levels are this rich. That doesn't mean LOCK NOW as much as it is an ALERT to set a target and stick to it. Be mindful of the fact that we are near the high side of the price range and rebate is almost as aggressive as it was before the Fed exited the mortgage market. GUTFLOP is not about short term success as much as being more efficient with your pipeline over the life of your career.