Stocks lost their overnight gains at 10am after econ data flashed and Ben Bernanke's prepared testimony was released to the masses. In unison with weaker equities, bond prices stabilized from their morning lows and have since returned to the middle of the recent range. We are not surprised to see "rate sheet influential" MBS and TSYs struggling to extend positive progress. Stocks have not confirmed a technical breakdown and official jobs data is due. From that perspective, barring an outlier ADP report, we'd assume benchmark 10s would trade between 3.40 and 3.50% leading up to the release of the Employment Situation Report on Friday morning.

FNCL 4.5's, while well off their 101-19 lows at 101-24 have not managed to get much higher and signs of resistance are emerging not only for MBS but also for treasuries. 10yr notes hit 3.45 and have since corrected up to 3.46. Bernanke Q&A and the stock lever could push bonds to retest their weakest levels or to break current resistance, in which case yesterday's highs could be retested.

We got all our Econ and Fed-Speak for the day in one swift stroke at 10am. The combined effect has been a good one so far for MBS and treasuries. FNCL 4.5's add another few ticks now at 101-24, and 10yr yields stand at 3.4586.

*** FED'S BERNANKE SAYS RECENT RISE IN COMMODITY PRICES LIKELY WILL LEAD TO ONLY TEMPORARY AND MODEST INCREASE IN U.S. INFLATION *** BERNANKE-SUSTAINED OIL PRICE RISE WOULD BE THREAT TO GROWTH, PRICE STABILITY, PARTICULARLY IF IT UNMOORS INFLATION EXPECTATIONS *** BERNANKE-SEE MORE SIGNS OF SELF-SUSTAINING RECOVERY BUT WON'T BE TRULY ESTABLISHED UNTIL SUSTAINED STRONGER JOB CREATION *** BERNANKE -JOB MARKET HAS IMPROVED ONLY SLOWLY BUT SEE GROUNDS FOR OPTIMISM ABOUT JOBS IN NEXT FEW QUARTERS *** BERNANKE SAYS DOWNSIDE RISKS TO GROWTH HAVE DECLINED, RISK OF DEFLATION "NEGLIGIBLE" *** BERNANKE - FED SEES INFLATION REMAINING LOW, LONGER-TERM INFLATION EXPECTATIONS STABLE *** BERNANKE - CHANGES IN DOLLAR VALUE UNLIKELY TO HAVE BEEN IMPORTANT DRIVER OF GLOBAL COMMODITY PRICE INCREASES *** SENATE BANKING PANEL CHAIR JOHNSON SAYS PROPOSAL TO STRIP FED OF JOBS MANDATE "WRONG IDEA AT THE WRONG TIME"

*** ISM REPORT ON U.S. MANUFACTURING SHOWS PMI AT 61.4 IN FEBRUARY (CONSENSUS 61.0) VS 60.8 IN JAN *** PRICES PAID INDEX 82.0 IN FEBRUARY (CONSENSUS 83.0) VS 81.5 IN JAN *** EMPLOYMENT INDEX 64.5 IN FEBRUARY VS 61.7 IN JANUARY *** NEW ORDERS INDEX 68.0 IN FEB VS 67.8 IN JANUARY *** ACTIVITY INDEX AT HIGHEST SINCE MAY 2004 *** EMPLOYMENT INDEX AT HIGHEST SINCE JAN 1973 *** NEW ORDERS INDEX AT HIGHEST SINCE JAN 2004

US JAN CONSTRUCTION SPENDING -0.7 PCT (CONSENSUS -0.4 PCT) TO $791.82 BLN VS DEC -1.6 PCT (PREV -2.5 PCT) *** PRIVATE CONSTRUCTION SPENDING -1.2 PCT, PUBLIC SPENDING +0.1 PCT *** PRIVATE NONRESIDENTIAL CONSTRUCTION SPENDING LOWEST SINCE AUG 2004

Minutes to go now until 10am data and the morning selling streak has corrected somewhat with FNCL 4.5's back up to 101-21 and 10yr notes down under 3.47 after bouncing supportively at 3.49.

FNCL 4.5's are down 11 ticks on the day now to 101-18. In general, MBS has been doing better than treasury benchmarks which is usually the case when prices are falling. The 10yr note is up 6.44bps today at 3.4864. If a particular lender was out with rates earlier this morning, reprices for the worse are possible.

A quote from Treasury Secretary Tim Geithner's prepared remarks for a speech to be given to the House Financial Services Committee today: “Each of the longer-term reform options we have outlined will require legislation from Congress, and we hope to work together with you and your colleagues to pass comprehensive legislation within the next two years. Failing to act would exacerbate market uncertainty and risk leaving many of the flaws in the market that brought us to this point in the first place unaddressed.”

Momentum, Flight-to-Safety, and Month-End. Three important friends to the fixed income market in recent weeks. Over the past few days, momentum reached positive levels not seen since October, certainly far enough into "overbought" territory to fear a technical pull-back. That sell-sign coincided with the last day of the month yesterday, and although the month-end was having a positive effect on bonds on Friday, it was still a factor in yesterday's gains. But perhaps the most fickle constituent of the bond-bid would be the Libya Risk Trade. It's not that the flight-to-safety is "over" by any means, just that tough talk and traipsing tanks are enough to lift off the FTQ accelerator pedal. FNCL 4.5's are down 8 ticks to 101-21, and the 10yr note is up almost 5bps at 3.4697.

Bloomberg reports that China, America’s largest creditor, increased its holdings of U.S. debt to a record $1.175 trillion in October, according to revised data issued by the Treasury. The nation’s investment totaled $1.16 trillion at year-end, the Treasury Department reported yesterday, raising the figure from the previous $891.6 billion. Japan maintained its place as America’s second-largest lender, with $882.3 billion of Treasuries at year-end, compared with $883.6 billion before the revision. The Asian nation’s Treasury holdings climbed amid a bond- market rally. U.S. debt gained from April through September before handing investors a loss in the fourth quarter of last year. The euro tumbled to a four-year low against the dollar in June as governments arranged a bailout fund to rescue the region’s most indebted nations. Chinese officials had been saying they wanted to seek investments outside the U.S.

(Reuters) - Factory input costs leapt across the globe in February, the latest sign of rising inflationary pressures, while euro zone manufacturing grew at its fastest in nearly 10 years, surveys showed on Tuesday. British manufacturing also grew strongly, at its fastest pace in nearly two decades, and Indian factory growth accelerated. But in China, where the authorities have raised rates and bank reserve requirements multiple times since last year, factory growth slipped to its slowest pace in six months. These observations fit well with our call for a margin squeeze in 2011. Look for rising input prices in today's ISM Manufacturing Index, which will be released at 10am.

Reuters reports U.S. Secretary of State Hillary Clinton accused Libyan leader Muammar Gaddafi on Monday of using "mercenaries and thugs" to suppress a popular uprising as world leaders sought new ways to isolate and oust him. "We have seen Colonel Gaddafi's security forces open fire on peaceful protesters. They have used heavy weapons on unarmed civilians. Mercenaries and thugs have been turned loose to attack demonstrators," Clinton said. "Through their actions, they have lost the legitimacy to govern. And the people of Libya have made themselves clear: It is time for Gaddafi to go -- now, without further violence or delay," she told the U.N. Human Rights Council in Geneva. Stocks in London moved slightly into the red after news flashed that Saudi Arabia was sending tanks to Bahrain ahead of the latest pro-democracy demonstrations. Analysts have been wondering if Saudi planned to intervene, and these reports - if accurate - suggest it does. The real concern for the West is if the unrest spreads to Saudi itself.

Stocks rallied around the globe in overnight trading and interest rates suffered in the process. The NIKKEI closed 1.22% higher. The Shanghai Composite improved 0.47%. In Germany the Dax is currently 0.29% better while the FTSE in London is 0.13% worse. Meanwhile domestic stock futures are pointing upward. S&Ps are +3.50 at 1329.50 and Dow futures are +25 at 12239. As stocks rallied overnight, interest rates moved higher and the yield curve steepened. The benchmark 10-year Treasury note is currently -13/32 at 101-10 yielding 3.468% (+4.6bps) and the 2s/10s curve is 3bps steeper at 276bps wide. The FNCL 4.5 MBS coupon is -7/32 at 101-22. A cluster of support is seen around 3.46-3.48% for the 10 year TSY note.