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NEW YORK, April 6 (Reuters) - Prices of U.S. mortgage bonds
climbed early on Tuesday, rebounding from back-to-back sessions
of huge losses which were sparked by fears interest rates would
turn higher on data showing faster economic and job growth.

But market players played down the early bounce because
poor bids in an auction of $16 billion of five-year U.S.
Treasury notes <US5YT=RR> set for later Tuesday could renew
selling across the entire bond market.

"Mortgage-backeds are doing fine so far today," said Andrew
Harding, director of fixed income at National City Investment
Management Co. in Cleveland.

Given the market's steep decline, the early bounce was "not
that big a deal," Harding added.

The sharp rise in Treasury yields, benchmarks for U.S.
mortgage rates, forced many holders of U.S. mortgage bonds to
protect their portfolios from anticipated higher mortgage rates
and a decline in refinancing activities.

Slower refinancing means more "extension" risks for
mortgage investors because they are being paid back slower than
expected and lose out on reinvesting money at higher yields,

Prices of 15-year and 30-year MBS were mostly 3/32 to 14/32
higher in early Tuesday trade, after hitting their lowest
levels since early January on Monday.

Bond equivalent yields on 30-year, 5-percent issues were 5
to 6 basis points lower than late Monday.

The yield on benchmark 10-year Treasury notes <US10YT=RR>
was down to 4.17 percent from 4.22 percent at Monday's close.

U.S. Treasuries were boosted in part by weak German labor
data, which fanned talk of a European Central Bank rate cut and
a rally in euro zone debt.

Meanwhile, players are treading gingerly ahead of March
data on prepayments on agency MBS, analysts said.

Analysts forecast that more home loans will be prepaid last
month than February because a big drop in mortgage rates in
early March likely sparked a fresh wave of refinancing.

The market will receive the Wall Street analyses of the
March prepayment data from Fannie Mae
(nyse: FNM - news - people), Freddie Mac

(nyse: FRE - news - people) and Ginnie Mae by early Wednesday.

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