MBS RECAP: Positive Progress

The stock lever continues to exhibit a high degree of correlation. S&P's have rapidly moved up from 1248 to 1264 and during the same time 10's have come up from 3.17 to 3.21, taking them just outside the trend channel that has guided them to lower and lower yields today. FNCL 4.5's are 16 ticks improved on the day at 102-21 after getting as high as 102-27, but would have to fall further before reprice risks for the worse increase.

Treasury yields and stock index values continue to pace each other with a high degree of correlation. That has been a good thing for bonds in the short term as the S&P has fallen to 1262.58 with no concerted effort to rally or correct higher. 10yr yields are down from 3.23 at 1pm to 3.20+ now. FNCL 4.5's are +16 ticks on the day at 102-21, and FNCL 4.0's are up 21 ticks at 99-17. Reprices for the better are still trickling in.

Lenders had likely been waiting for the most severe correction to the original knee-jerk reaction to play out. Now that it's clear that bonds aren't simply going right back to previous levels, but instead are operating with less volatility in a much lower range (3.21's in 10yr notes), MBS have improved enough and held those improvements long enough for reprices for the better. FNCL 4.5's are at 102-18 and have not gone lower for almost an hour. No coincidence then that we've just seen our biggest batch of lenders repricing for the better. More will follow as this 102-18 level holds or if MBS improve.

A panic driven flight to safety poured into the bond market after two headlines crossed newswires this morning indicating the nuclear crisis in Japan was approaching "catastrophic" status. Stocks attempted a rebound after these headlines flashed but have since lost steam and returned to the lows of the day. A risk averse bias has helped bond prices rally significantly. The 10-year note is +28/32 at 103-19 yielding 3.199%. The FNCL 4.5 MBS coupon is +14/32 at 102-19. REPRICES FOR THE BETTER ARE POSSIBLE.

(Reuters): Today 08:19 - FED OPERATION HAS BEEN EXTENDED, NOT CANCELLED-PERSON FAMILIAR WITH THE MATTER

RTRS-EU ENERGY COMMISSIONER'S SPOKESWOMAN SAYS OETTINGER DOES NOT HAVE ANY SPECIFIC EXTRA INFORMATION ON THE SITUATION IN JAPAN.

(Reuters): Today 08:16 - NEW YORK FED CANCELS COUPON PURCHASE OPERATION - DOW JONES

Dow Jones Newswire reports that the EU Energy Chief says the situation at a nuclear plant in Japan is "effectively out of control" and that there is a "possible catastrophic even in the next hours." Volume in stocks and bonds skyrocketed following the news as the 10yr note fell initially to 3.14, but has since been bouncing back into the mid 3.2's. FNCL 4.5's are up 14 ticks on the day at 102-19. Expect lenders to let the volatility die down before reacting with any reprices. The knee-jerk is in the process of resolving itself .