Mortgage backed securities (MBS) prices opened lower (-19bps) after Fed Chairman Bernanke's comments yesterday that he is encouraged by U.S. banks' plans to raise capital after government stress tests and with increased speculation the worst of the world wide recession may be over reducing demand for the safety of fixed income assets, like MBS.

The market has since turned around; FNMA 4.0% coupon 100.08bps, unchanged on the day & the high. U.S. trade deficit, the difference between imports and exports, widened in March as the global economic downturn caused exports to decline 2.4%, numbers that bode ill for manufacturing.

Imports also decreased, 1%, as a drop in demand for industrial supplies offset an increase in imported oil. Data from ICSC-Goldman & Redbook shows chain store sales rose 0.3% last week, boosted by warmer weather and Mothers Day with consumer traffic strong.

Later today the Treasury Budget report is due out for April, typically showing a sizeable surplus from tax receipts, however fiscal stimulus and various bailout plans have pushed federal spending up sharply. Half way through the fiscal year the deficit stands at 956.8 billion, double last years at this time. Foreign investors do not like large deficts and an additional increase could shut off the flow of funds into the U.S., pushing up bond yields and mortgage rates. Major economic reports will come out later this week as investors shift attention to retail sales and inflation numbers.