Mortgage Bonds are trading higher this morning, but the gains are modest despite weaker than expected economic data, Stock prices falling and unit labor costs dropping in the productivity report, which is viewed as non-inflationary.

ADP reports that private employers added 135K jobs in May, below the 157K expected while April's data was revised to 113K from 119K. The number comes ahead of Friday's government payrolls report where it is expected that 159K jobs were created in both the private and public sector last month.

The Labor Department reported this morning that Productivity in the first quarter of this year rose by 0.5%, in line with estimates. Within the report it showed that unit labor costs fell by 4.3%, which represents the cost of labor to produce a single unit of product, which was due in part to a -3.8% decline in hourly compensation.

Later this morning the ISM Service Index will be released at 10:00am ET and the Fed's Beige Book will be announced at 2:00pm ET. Both have the potential to impact trading.

The Mortgage Bankers Association reported this morning that its Market Composite Index, a measure of loan application volume, fell by 11.5% in the latest week as the 30-year fixed conventional home loan rate hit its highest level in a year, just above 4%. The refi index declined by 15% while the purchase index fell by 2%.

Technically, Mortgage Bonds are oversold, but that can continue for some time as the tapering talk has gone from indefinite to inevitable. With this morning's weak jobs data and the drop in unit labor costs, which as we mentioned is non-inflationary, the 3% coupon is trading just slightly higher.

We will continue to recommend Locking as we head into tomorrow's Weekly Claims data and Friday's closely watched payrolls report. Stay tuned throughout the session for any sudden changes.