Mortgage Bonds are drifting lower ahead of tomorrow's closely watched monthly Jobs Report where it is expected that employers added 159K new jobs in May. Traders are cutting positions and positioning themselves to avoid any headline risk.

The Labor Department reported that Weekly Initial Jobless Claims fell by 11K in the latest week to 346K and just below the 348K that was expected. This could signal that federal budget cuts and payroll tax increases may not be impacting employers headcounts at firms across the nation. However, the four-week moving average, which smoothes out any seasonally abnormalities, rose to 352,500 last week from 348,000.

In addition, outplacement firm Challenger, Gray & Christmas reported that planned layoffs at firms across the nation fell by 4.5% in May and declined for the third month in a row. Since May of 2012, planned layoffs plunged by 41% - Challenger said that "the threat of massive job cuts related to federal spending cuts has failed to materialize."

FYI - Today is the 69th anniversary of D-Day when the Allied Forces landed on the beaches of Normandy, France. We honor all those who sacrificed.

Jobs Report Strategy

No one knows what the number will be tomorrow, but expectations are calling for 159K new jobs created in May and the revisions for the previous 2 months will also be a factor, just as it was last month.

Technically, Bonds have dropped 500bp since the positive April jobs report was released on May 3 and throw in the talk of the inevitability of QE tapering possibly sometime late this year and we have the reason behind the fall. We, however, feel that QE will not end in 2013.

The headline risk that we could face if the number comes in more than expected leads us to continue our Locking stance ahead of the report.