MBS ALERT: The Floor is Falling...BEWARE

The release of the ISM Manufacturing data has left the fixed income sector weaker after market participants noted the rise in the "PRICES" portion of the report...which unexpectedly rose 11.5 points from 32.0 to 43.5 in  May. This coupled with rising commodity prices and TIMMMMAY speaking in China about the budget deficit has refocused investor's on the detrimental effects inflationcan have on a fixed income portfolio. Stocks are trading aggressively in the green (8:1 buy vs. sell) after the New Orders component of the ISM report went over 50...from contracting to expanding.

Since the open the benchmark 10 yr Treasury note has lost 45 ticks in price (-1-13) and its yield has risen 12bps from 3.51% to 3.63%....

...and rate sheet influential MBS prices have fallen 23 ticks (23/32)...back to where bids were mid-morning on Friday (right after the facemelter led to more rallying). MBS bids were holding solid near 100-07 for a brief time but prices could not remain stable while Treasury prices continued to fall (yields continued to rise). As MBS/TSY yield spreads tightened traders turned net sellers (too tight!) and prices fell more.

Now we wait to see where the yield curve finds its new sideways range. (3.50-3.70 is current resistance/support)...

All that said...rate sheets are worse this morning...