MBS MID-DAY: Holding Marginal Gains in Quiet Trade

MBS Pricing Snapshot

30-year fixed-rate mortgage (FRM) averaged 3.98 percent with an average 0.7 point for the week ending April 5, 2012, down from last week when it averaged 3.99 percent. Last year at this time, the 30-year FRM averaged 4.87 percent.

15-year FRM this week averaged 3.21 percent with an average 0.7 point, down from last week when it averaged 3.23 percent. A year ago at this time, the 15-year FRM averaged 4.10 percent.

5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.86 percent this week, with an average 0.8 point, down from last week when it averaged 2.90 percent. A year ago, the 5-year ARM averaged 3.72 percent.

1-year Treasury-indexed ARM averaged 2.78 percent this week with an average 0.6 point, unchanged from last week when it averaged 2.78 percent. At this time last year, the 1-year ARM averaged 3.22 percent.

The fact that yields are correcting higher as the domestic session picks up is the first clue and "us telling you" is the second clue that these gains are driven by the overnight session. Who else would you expect to come to the rescue when bond markets seem beset by dark times?

The team effort out of the EU overnight was led by Spain, where yesterday's weak debt auction kicked off a chain reaction of skepticism about the country being able to handle its debt. Germany and the UK piled on with weak Industrial Production reports and 'tradeflows' put the icing on the cake as traders were perceived to be squaring up positions ahead of the holiday weekend (many markets are closed tomorrow, though domestic bond markets are open until Noon Eastern).

Any talk of "position squaring" in this market carries the implication of "short covering" (when traders ultimately decide to buy a security that they'd bet would move lower in price). Although there was a solid line of defense after 10yr yields cracked 2.30% from other sources, short covering helped the bounce back yesterday and again overnight.

We don't say this to diminish the current rally, but rather to simply say "it is what it is..." The fact that yields ran almost precisely to the stronger end of their recent range and quickly stepped back is a very telling feature here... There's no CHANGE of strategy or "new trading ideas" as it were... simply an effort to square up positions or follow the ebbs and flows within the confines of a range, either because you're trying to be done with the holiday-shortened week or because you're waiting in the most nimble position ahead of tomorrow's NFP.

Bottom line, things are green, and that's nice, and we thank Europe for that, but don't read anything into it as far as big fundamental shifts... Truth be told, we'd rather come into NFP in more neutral territory and thus not have to defend a 'king of the hill' position.

*357k vs 355k consensus.
*Previous revised higher from 359k to 363k
*4 week avg down to 361.75k from 366k
*Continued claims down to 3.338 mln from 3.35 mln
*claims lowest since 4/2008

In the week ending March 31, the advance figure for seasonally adjusted initial claims was 357,000, a decrease of 6,000 from the previous week's revised figure of 363,000. The 4-week moving average was 361,750, a decrease of 4,250 from the previous week's revised average of 366,000.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending March 24, unchanged from the prior week's unrevised rate of 2.6 percent.

The advance number for seasonally adjusted insured unemployment during the week ending March 24 was 3,338,000, a decrease of 16,000 from the preceding week's revised level of 3,354,000. The 4-week moving average was 3,367,250, a decrease of 24,500 from the preceding week's revised average of 3,391,750.