Market Commentary:
 

Treasuries prices look to rally again today as equity futures are sharply lower on news from Greek Prime Minister George Papandreou who is calling a referendum and a parliamentary confidence vote which could risk pushing the country into default if rejected by voters thus unraveling the European debt rescue plan. Heightened Greek uncertainty is leading to the flight to quality bid but fears remain that the uncertainty could propagate to other fragile euro countries such as Italy which has seen its bond yields rise to 440bps above the benchmark German bunds, a Euro era record.

Investors ran for the safety of bonds Monday after what was a strong month of October for equities (~+10% on the Dow). Monday’s flight to quality bid sent 10yr Treasury prices higher and the yield to 2.116% while the Dow closed -276pts. The main culprit for the rally in bonds can be attributed to continued worries about U.S. labor markets and the European debt saga. Mortgages lagged a bit Monday as production coupons saw better buying with limited origination selling (~650mln) but just couldn’t keep pace with Treasuries after a late sell-off. Higher coupon MBS lagged the rest of the coupon stack after outperforming last week as the market began rethinking prepayment expectations associated with HARP 2.0. Some indications are of expected increase in the 5-8 CPR range while others are higher at 10-15 CPR. The 10-15 CPR crowd is expecting a larger impact on prepayment due to the fact that servicer behavior could change to a more active role because of changes in reps and warrants, streamlined appraisals, and the extension of the program to the end of 2013