MBS MID-DAY: 10/6/2011

Fannie 3.5's got pretty close to 102-00 after the Jobless Claims report but have since surged back more than quarter of a point and now sit only 3 ticks down vs 5pm at 102-11. While this significantly improves the rate sheet outlook, it could also cause delays. Domestic stock market open could still shake things up as well.

The last thing to consider is that we may soon find out that the big upswing was due to opportunistic Fed buying which could result in MBS drifting back toward previous lows.

- Initial Claims rose to 401k from a revised 395k
- Forecast called for 410k Initial Claims
- Big drop in Continuing Claims to 3.700 mln from 3.752 mln
- 3 Week moving average dropped to 414k from 418k

The market's reaction to this data should prove and is already proving frustrating to bond-bulls. While the numbers themselves are still rather ugly long-term, in the context of recent ugliness, they're not as alarming. This is another one of those cases of "less-bad = good."

MBS are dropping like rocks and TSY's are rising quickly

-Fannie 3.5's are down 11 ticks on the day now at 102-03
- 10yr yields are up almost 6 bps to 1.94

Please keep in mind that the supportive upper ceiling of the 10yr Treasury trend channel is near 2% even. Markets are positioning for moderate to strong NFP tomorrow as well as continuing to trade the "risk-on" sentiment on the hopes of European bank recapitalization. Our moderate losses this morning are merely ebbs and flows of a volatile and uncertain market. Unfortunately, the current is moving in the wrong direction for rate sheets, which should be slightly weaker than opening levels would suggest, and possibly slightly delayed due to the volatility.

Stock futures and interest rate generally drifted higher overnight, but with no meaningful volume until the few hours before the domestic session.

10yr yields traded up to 1.92 but quickly fell back into the 1.89's after the Bank of England left interest rates unchanged, citing higher inflation. That put a dent in stock futures as well, but after only a brief reversal of the overnight sentiment, all sides of the market have bounced right back ahead of 830am Jobless Claims.
- Fannie 3.5's are 6 ticks down from yesterday at 102-08
- 10yr yields are up almost 4 bps to 1.93

For MBS, this is lowest end of the trend channel they've been in since early August and for TSYs, looking like a technical bounce off their midpoint with support up around the 2% range.

If current weakness holds, rate sheets should be weaker. Jobless Claims could be a moderate market mover, but won't cause any strategic shifts in the way that tomorrow's NFP might. After Claims, there's no other scheduled economic data of note this morning.