Not much to report today as the economic calendar is light (Trade Balance -38.5B vs. -46B expected) and there wasn't much news overnight. The yield curve is slightly flatter and 10-year notes are about a tick higher vs. 3:00 PM closes. Despite the Rates Market being stable, MBS prices are continuing to underperform. FN 3% are underperforming duration hedges by 4 ticks as hedge fund, REIT, and Money Manager selling weigh on mortgage prices. As rates have backed up, production has shifted towards the 3.5 coupon and G2 3.5s have suffered particularly. The I/II 3.5 swap has moved all the way to 14 on the back of Money Manager buying in GN I and originator selling in IIs. The FED purchase data from last week showed purchases of only 700MM in G2 3.5 vs. over 4bln in G2 3. With Japan quiet, there aren't many investors adding G2s here and until the Fed steps up their 3.5 purchases and/or money managers move to buying G2 that swap will continue to suffer. Enjoy the weekend!
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