10yr notes have made 3 distinct attempts to move lower into the 3.42's but all have failed so far as stocks have made 3 separate bounces in the high 1290's. That has left 10yr yields currently at 3.441 and S&P's at 1298.88. FNCL 4.5's are off their highs as well, at 101-26 currently, which is 5 ticks up on the day. With 2 hours to go until the 30yr auction and with the yield curve steepening since 10:40am, it's doubtful bonds can get any stronger unless stocks are able to break lower beyond recent support.

From a 2004 Bernanke Speech: "The economist's argument for free trade is disarmingly simple. Trade is beneficial because it facilitates the division of labor, allowing each person to specialize in the type of production at which he or she is relatively most efficient. At the most basic level, a world in which each person produced everything that he or she consumed would be primitive indeed, as no single person or family in isolation could produce more than a few rudimentary goods and services. In contrast, if each person concentrates on just a few activities, economies of scale and the development of specialized skills allow production to become much more efficient. Thus, if each of us focuses our efforts on just a few types of production and then trades our output with others, we can enjoy a far more varied and abundant supply of goods and services than we could if each person remained an isolated economic unit. Moreover, specialization tends to encourage innovation and hence promotes dynamism and growth as well as efficiency. READ THE FULL SPEECH. LEARN MORE....

Stocks looked as if they would make a support bounce earlier, off 1297 levels in S&P. But as they were unable to get through 1302 and have fallen back to 1297, treasuries have perked up and followed faithfully back to test the high 3.42's. FNCL 4.5's met some resistance at 101-29 and currently sit at 101-28. So far, rally-mode is on this morning for treasuries, but MBS aren't likely to keep pace into the rally. Mainly, we wait for the 30yr auction today, and economic data tomorrow, in order to confirm the good times can keep rolling.

(Reuters) - Moody's downgraded Spain's sovereign debt rating by one notch on Thursday and warned of further cuts to come as it expects bank restructuring will cost more than twice what the government expects. "(Moody's) believes there is a meaningful risk that the eventual cost of the recapitalization effort could considerably exceed the government's current projections," the ratings agency said in a statement. The cut in the rating -- to Aa2 from Aa1 -- drove the euro to session lows against the dollar and the premium investors charge for Spanish 10-year debt instead of German Bunds expanded to its widest point in two months at 232 basis points before narrowing again to 226. The Bank of Spain will release its own report on banks' capital needs after markets close on Thursday. The European Central Bank backed Spain's planned measures to shore up the sector, while Prime Minister Jose Luis Rodriguez Zapatero defended Spain's economic fundamentals as reasonable. The government and central bank have forecast no more than 20 billion euros would be needed to recapitalise weak banks. But Moody's said the overall cost was likely to be nearer 40-50 billion euros. In a more stressed scenario recapitalization needs could even rise to around 110-120 billion euros, it said.

Municipal bonds are debt securities issued by or on behalf of U.S. state and local governments, their agencies or authorities. These issuers sell bonds to fund either their general operations or specific projects, such as the construction of bridges or highways. The two main types of municipal bonds are general obligation bonds (G.O.s) and revenue bonds. G.O.s are municipal bonds secured by the full faith and credit of the issuer and usually supported by the issuer’s taxing power. Revenue bonds are secured by the charges tied to the use of the facilities financed by the bonds. For example, revenue bonds are issued to fund toll roads, bridges and water treatment facilities, among other projects, and are secured by the tolls or fees collected by these facilities. side from the specific set of issuers—state and local governments—the defining characteristic of municipal bonds is their tax status. The interest income earned on most municipal bonds is exempt from federal income taxes. Interest payments are also generally exempt from state taxes if the owner of the bond resides within the state that issued the security, and the same rule applies to local taxes.

Following Trade Deficit and Jobless Claims Data, MBS moved a few ticks higher than yesterday's best levels with the FNCL 4.5 at 101-25. But whereas everything from 3.5's to 5.5's is up at least 3 ticks, the 4.0 coupon is up only 2 ticks. This moderate lag versus the rest of the stack has been a common theme this morning as the MBS market continues to show us the market-based evidence of the difficulty facing the primary market in breaking free of the 4.875% best-ex. So even with the improved MBS picture, we'd expect improvements over yesterday to be relatively mild as the incentive continues to be light for lenders to price aggressively.

(Reuters) - Wells Fargo CEO John Stumpf says principal forgiveness on mortgages would have "huge impact" on Fannie Mae/Freddie Mac. Says principal forgiveness could create incentive for borrowers current on underwater mortgages to default. Says Wells has forgiven $4 billion in principal on loans it holds, but only works in "very specific situations"

At $9.4 billion, Los Angeles County, Calif. leads the country for counties spending the most money on remodeling, according to the National Association of Home Builders (NAHB). Rounding out the top 5 list is Cook County in Illinois, Orange and San Diego counties in California, and Maricopa County in Arizona. “Total remodeling spending in a particular county is most strongly related to the number of home owners in the county,” according to NAHB Chief Economist David Crowe. “On the other hand, we found that remodeling per home depends upon factors such as the share built before 1980, the share owned by married couples, and, most significantly, the average value of the homes.”

*** JOBLESS CLAIMS ROSE TO 397,000 MARCH 5 WEEK (CONSENSUS 378,000) FROM 371,000 PRIOR WEEK (PREVIOUS 368,000) *** JOBLESS CLAIMS 4-WK AVG ROSE TO 392,250 MARCH 5 WEEK FROM 389,250 PRIOR WEEK (PREV 388,500) *** CONTINUED CLAIMS FELL TO 3.771 MLN (CON. 3.760 MLN) FEB 26 WEEK FROM 3.791 MLN PRIOR WEEK (PREV 3.774 MLN) *** INSURED UNEMPLOYMENT RATE UNCHANGED AT 3.0 PCT FEB 26 WEEK (PREV 3.0 PCT) *** CONTINUED CLAIMS LOWEST SINCE WEEK ENDED OCT 18, 2008 (3.764 MLN)

*** JAN TRADE DEFICIT $46.34 BLN (CONSENSUS $41.50 BLN) VS DEC DEFICIT $40.26 BLN (PREV $40.58 BLN) *** JAN EXPORTS +2.7 PCT VS DEC +1.9 PCT, IMPORTS +5.2 PCT VS DEC +2.6 PCT *** JAN GOODS DEFICIT $59.75 BLN, SERVICES SURPLUS $13.41 BLN *** JAN EXPORTS $167.74 BLN VS DEC $163.30 BLN, IMPORTS $214.08 BLN VS DEC $203.56 BLN *** JAN CAPITAL GOODS IMPORTS RECORD $41.71 BLN VS DEC IMPORTS $39.61 BLN *** CHINA JAN TRADE DEFICIT $23.27 BLN VS DEC DEFICIT $20.68 BLN ***-OPEC JAN TRADE DEFICIT $9.95 BLN VS DEC DEFICIT $8.31 BLN *** JAN OIL IMPORT PRICE $84.34/BBL, HIGHEST SINCE OCT 2008, VS DEC $79.78/BBL, +14.1 PCT FROM JAN'10 $73.89/BBL *** JAN EXPORTS AT RECORD HIGH, IMPORTS HIGHEST SINCE AUG 2008