It was a great day for MBS yesterday as a sell-off in stocks prompted bond buying.  The 5.5% coupon finished the day at 100-23 which is almost enough profit margin to bring 5.5% at PAR within reach for many wholesalers (some of the more aggressively priced will be there), IF WE HOLD THE GAINS.

Yes, MBS is faring well despite good data, but the morning is young, and most of the data is against us.

1. Jobless Claims fell 18k to 365k, slightly better than the expected fall of 10k.  In general, the weaker the labor market, the better MBS fare.  On a deeper level of the data though, examining the trend in continuing claims points to the weekly claims reading remaining high, but still not as high as the 2001 recession.  Remember that the Jobless claims number only refers to NEW claims.  There is also a component of continuing claims that often goes unmentioned but is equally important.  Here is what the jobless claims report has looked like for the past few months:

notice the rising continuing claims:

2. The central banks in Europe and England made no change to their benchmark lending rates.  ECB president Trichet is more of an inflation hawk than our good 'ol boys at home, and prefers to combat inflation despite a weakening global economy.  This has the potential to make European bond debt more attractive to investors compared to Us Treasuries.  This isn't necessarily bad for MBS, but if investors are "enticed enough" to make their fixed income investments abroad, there will simply be less for them to invest in any other FI investments, including MBS, which will force mortgage rates higher.

3. Numerous retailers, including some of the whales like Wal-Mart and Costco are posting strong sales numbers.  Though any sign of economic strength is something MBS would rather not see, the fact that these "value" chains are posting strength as opposed to Nordstrom is somewhat of a saving grace as we would expect them to do well in a weak economy where consumers pull back and look for bargains

Still to come is the wholesale trade and money supply reports, not normally major movers of MBS.  As such, we can expect the stock market, yet again, to have a larger than normal impact on MBS today.  Treasuries ARE NOTE tracking well with MBS this morning, so you will need to stay tuned to the blog for potential reprices. 

We are just barely holding at positive on the day, which is very good considering yesterday's run-up.  It's definitely a good morning to lock from a historical perspective.  However, if the economic data is not enough to spark a stock advance, and moreover, if stocks decline for a second day, we could see another round of price improvements.  As is the case any time MBS are both near the highs of their trading range and have recently risen appreciably, the absolute highest degree of caution must be exercised if you are not going to lock with the gains.  This means eternal vigilance on your part.  Lock requests should be on the fax machine, ready to go, online lock requests filled out, saved, and ready to submit.  Stay glued to stocks and treasuries for signs of activity, and then check the blog to see if MBS are following suit.

So although we must watch for sharks, it's another day with the water wings on.  I'll be out there myself, but don't expect me to hang around if the sharks start circling.  If I see them coming, I'll yell as loud as I can!