MBS MORNING: Non-Voter Yellen Voices Dovish Opinion. Not Much Reaction

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Good Morning. The interest rate market is still trying to rub the sleep from it's eyes.  Trading volume is below average and many market watchers are doing just that....watching. There has been a lack of meaningful new economic data  to discuss and headlines have been geared more toward the events of tomorrow and the rest of the week ahead. Seems like the market is in a holding pattern today. China was out buying overnight which triggered short covering and helped rates move marginally lower for a time....that bias really has not spread to other accounts though. Yawn. Check out how sideways we've been for the past few sessions.

Non-voting San Francisco Federal Reserve Bank President  Janet Yellen did take a turn at the bully pulpit today. Her prepared speech was out at 11AM, Yellen shared dovish thoughts and low rate feelings. She did mention that the housing market could weaken after the Fed exits the mortgage market, thanks Captain Obvious. In that regard Yellen is not a fan of selling the Fed's assets. Mortgage rates like that. She also thinks the V-shape recovery is unlikely and doesn't believe right now is the right time to be removing accommodative monetary policy. She sees inflation as "undesirably low anticipates the unemployment rate will improve in 2010 (to 9.25%)...while this is positive, her tone was cautious and in now way indicative that a rate hike was in the near future. Again we were reminded how the Fed will ramp up it's exit from the a banking system: through adjustments of interest rates charged on bank reserves, not the Fed Funds Rate. Yellen was an FOMC voter in 2009...but isnt in 2010....so the market blew this off for the most part. Yawn.

Plain and Simple: the Fed's exit from the banking system will be a slow and steady process. They will not hike the Fed Funds rate until the economy and markets are completely prepared to stand on their own. Read and react is the strategy in play.  READ MORE . As far as Yellen's comments go...she didn't tell us anything we don't already know, plus she is a non-voter...making it easy for the the market to blow her off. Ben Bernanke on the other hand will move markets.

Flows in the mortgage market have been slow as well. This has allowed for the appearance of a bargain buying presence in "rate sheet influential" MBS coupons. I am not talking price though...I am referring to yield spreads or relative value...MBS yields are outperforming benchmarks. "Down in coupon" MBS positions got cheaper vs. TSYs toward the end of last week, because originator supply has been minimal today and there really isn't much else to trade...yield spreads are recovering lost ground in a thinly traded market. No big deal, nothing to get excited over. READ MORE.

The FN 4.0 is +0-05  at 97-06 yielding 4.268% and the FN 4.5 is +0-02 at 100-09 yielding 4.496%. The secondary market current coupon is now 4.482%. The CC yield is 68.8 basis points over the 10yr TSY note yield and +59.4 basis points over the 10 year swap rate.

US stock markets have been somewhat choppy today. All three indexes are hovering around unchanged at the moment. The dollar continues to improve against the Euro, albeit only moderately. Oil is up on the day.

The yield curve is steeper ahead of $8 billion 30 year TIPS at 1pm. I do not see much hope for better rate sheet rebate today.