MBS MID-DAY: 1/10/2011

Reuters notes that the Fed will begin consolidating CUSIPS (tracking numbers on MBS) in it's portfolio from 44,000 to less than 10,000, citing administrative cost reduction. The Fed says: ""No inference should be drawn from CUSIP aggregation about the timing or nature of any future monetary policy actions," and we quite agree. If you hear any speculation as to the implications here, disregard.

The Washington Post highlighted some data behind the sharp losses in December. In so doing, they also unintentionally are suggesting a contributing factor in recent bond market resilience. Primary dealers reduced their holdings of treasuries at the fastest pace since 2004, from $81.3bil to $2.34bil (11/24 to 12/29). In conjunction with the shedding of tsy allocations in portfolios and nominal year end window dressing, we have a lot of causality with which to view December drama. On the upside for bonds however, this speaks volumes to the POSITIONAL REBALANCING we've recently noted.

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10yr yields have now touched 3.27's on the day, in line with the lowest yields seen on 12/31. The longer we stay here or further we improve, the more likely it is that we see a test of the next resistance levels around 3.25. From there, it's a large step to the next resistance at 3.17. For MBS, 4.5 FNCL's are at 102-27, best levels of the day.

First layer of downside risk at 102-17. Second layer at 102-10. First upside layer at 103-02. ***It's advisable to synthesize these targets with specific lender behavior. If a lender has a tendency to reprice more or less aggressively than average, adjust accordingly. Levels apply best to lenders releasing rates within a 1 hour window centered on the time of this notice.

Validation and sighs of relief this morning as the healthy gains from Friday's post-NFP are proving to be more than just a passing fancy. A plateau of sorts was reached last week as bonds moved sideways after reaching their best levels just after Noon Friday. Opening levels not only remain in that range, but are in fact at the high end in MBS 4.5's which are up 3 ticks at 102-24. Barring any concerted selling effort, this should bode well for morning rate sheets.