Mortgage backed securities (MBS) prices opened strong and have continued to trade higher (rates lower) as investors believe yields may have peaked, citing technical analysis showing the increase losing momentum, which may spur demand at this week's Treasury auctions.

We have switched the current coupon from 4.5% to 5.0% to better reflect market conditions. Today's Treasury auction of $35 billion in 3yr notes will be closely watched for the level of demand as investors bid for 2.66 times the amount offered last month and has averaged 2.49 times for the last seven sales. Treasury Secretary Geithner speaks twice today, first in front of a Senate subcommittee on financial services, then holds a briefing ahead of G-8 finance ministers meeting. Chain store sales according to ICSC-Goldman were down 0.8% , the lowest reading since early May, while Redbook reports a plunge of 4.3% citing cooler weather and the prior months stimulus check burst of spending fading. Wholesale inventories fell a steep 1.4% in April, as distibutors tried to cut excess supply to better reflect decreasing sales. Today's figure was larger than expected and follows a revised lower 1.8% decrease in March and indicates that firms are still in deep drawdown mode, but given the prospect of economic recovery, should help to boost future production and employment as firms restock to meet demand. Risk premiums have fallen as investors continue to search for higher yields; risk premiums on "junk" bonds have fallen to their lowest level since September 26 with the spread over comparable Treasurys at 10.7% compared to a high over 20%.