From The Desk Of Laura Wheeler

Failure to build on yesterday’s rally suggests that we are in the midst of a move back into a range trade between the high of 128-05 (2.44 yield) and the low at 126-20 (2.62 yield). We have seen a good bit of consolidation today with mtg backs suffering about 10 to 15 ticks on the lower coupons which has brought the market back into the upper middle of this range. Our position is neutral as we see the market just lining itself back up into position. It would take a move below the 126-20 mark for us to believe that more downside is possible, and on the flipside, a break above the 128-05 area would suggest further upside (better rates) is upon us. You are seeing the market come back to reality after this week’s releases and the fact that the report this morning came out a little better than expected. The bottom line is that the payroll report reflected much better job growth (enough to stabilize the unemployment rate but not reduce it) and the household survey shows more weakness. There is now at least some reason to be optimistic on the jobs front. On an important side note, President Obama, for the first time, signaled that he was open to discussing the extension of all of the Bush tax cuts including the cuts for the highest income bracket. The president’s spokesman, Robert Gibbs, said that while he is open to the discussions, he will not be willing to extend them permanently. Senate Minority Leader Mitch McConnell tacked the opposite direction yesterday saying that the Republicans would not compromise with the President when his policies are in opposition to the will of the people.

Again, our position is flat/neutral on the bias that we will trade the range for the better part of next week, especially with a closed bond market on Thursday for Veterans Day.