MBS MORNING: "High Middle" of yesterday's range.

Surprise surprise, it's another range-bound trading day.  The gap today is very narrow with 102-03 the low on 4.5's and 102-07 the high.  I can' impress upon you enough just how narrow this range is in the context of recent history.

Currently 4.0's are still 4 ticks at 100-20.  4.5's 2 ticks down on the day at 102-05 and 5.0's are the same as morning levels.

Wire transfers will be going out today to satisfy January trades that are settled this week.  This means that funding lines will be replenished by the end of the day.  What MBS originators then do with that money will dictate the upcoming coupon supply. 

Against the backdrop of relative stability, day traders and profit takers have been wont to cash in gains where they've surfaced.  This has led to a stronger than expected bid for higher coupons.  The stronger bid improves prices in higher coupons leading some origination to "chase" the higher yields on the previously undervalued coupons.  The settlement will be one of several factors that shifts the control of the market back to sellers, who should gradually move back down in coupon.  We might be enduring some more selling than normal and some more bid for higher coupons in the meantime.  However, remember the root cause for this is the prepayment speed uncertainty.  As these statistics become more known and/or accepted, 5.0's-6.0's will become less attractive once again.  Lenders simply have to "prove" the market's ability to refinance eager borrowers wanting to get out of these rates.

Until acted upon by a salient force, sideways trading should persist making for boring price action.  Slowly but surely, as seller's credit cards are zeroed out, we should see the forces of competition, now unencumbered by funding considerations, BEGIN to drive spreads between lenders rate sheets and MBS tighter.