The 101-20 technical line of defense mentioned in the last update as well as in the Rates Techs post from Monday continued to hold and give way to stabilization in the fairly steep losses between noon and 2pm. The coinciding 10yr yields are near 3.45, and as volume dies down and these levels drift sideways into the after hours session, it seems this is where the bond market wants to go out this week. Reprices for the worse have been seen, and some may continue, but the sell-off appears over.

10yr yields are making their most pronounced movements that connote "cresting" as they approach 3.46, a technical level that came into play on the way down. MBS are resisting the sell-off to a good extent as FNCL 4.5's are down only 6 ticks on the day at 101-20, also a key technical level. Nonetheless, reprices for the worse have been seen and may continue as long as these prices persist or worsen.

Early signs of weakness were telling! Benchmark Treasuries have extended their losses and "rate sheet influential" MBS prices are playing follow the leader lower. Reprices for the worse have been reported.

After stagnating near key inflection levels for what felt like an eternity the 10 year Treasury note has broken through a cluster of support between 3.40 and 3.42%. This directional move started last week as a technically-driven drift higher from overbought levels at 3.18% . An extension of the equity rally combined with steady hawkish Fed rhetoric then contributed further weakness and now the market is using the environment to work on a price concession for next week's $99 billion Treasury coupon auction process (2s/5s/7s). There has been little push back against this move in TSYs as a result. We are however seeing buying in mortgages which indicates real money investors are still interested in current yield valuations/price levels.

(Reuters) - The U.S. economy would have to take a turn for the worse for the Federal Reserve Bank to consider extending its current round of bond-buying beyond its slated end in June, a top Fed official said on Friday. "I am not one who would say that I would remove all possibility of further easing, but that would require conditions to worsen materially from what I forecast," Bloomberg News reported Kocherlakota as saying. "If the economy evolves the way I forecast, I would not foresee us doing further accommodation." Kocherlakota, one of the more hawkish members of the Fed's policy-setting committee and a voting member this year, made the comments to reporters at an event in Marseilles, France. He said he expects the Fed to complete its current $600 billion of Treasury securities purchases.

Following comments from Fed's Plosser, 10yr note yields shot up to 3.429 and FNCL 4.5's are down to 101-26, just past the lows of the day. This introduces the risk of reprices for the worse, and that risk will get progressively more serious if MBS tick down from here.

(REUTERS) - The U.S. economy is on a firmer footing, and the U.S. central bank will have to reverse its easy money policy in the "not-too-distant future" to avoid sowing the seeds of inflation, a top Federal Reserve official said on Friday. Speaking in New York, Philadelphia Federal Reserve Bank President Charles Plosser said the earthquake and nuclear crisis in Japan and the rise in oil prices because of turmoil in the Middle East pose a risk to the U.S. recovery -- but said he expected this risk to be small and short-term. He said consumer spending continues to expand at a "reasonably robust pace," and the labor market is improving. The overall economy, he said, has gained "significant strength and momentum" since the summer. "If this forecast is broadly accurate, then monetary policy will have to reverse course in the not-too-distant future and begin to remove the massive amount of accommodation it has supplied to the economy," Plosser, one of the central bank's biggest inflation hawks, said. "Failure to do so in a timely manner could have serious consequences for inflation and economic stability in the future," said Plosser, a voter on the Fed's policy-setting committee this year. At its last meeting, the Federal Reserve voted unanimously to keep its plan to buy $600 billion in U.S. government bonds through June unchanged. The Fed cut interest rates to near zero during the crisis and is buying bonds to further ease monetary policy. Plosser outlined his preferred strategy for eventually tightening policy. He said he would like to raise interest rates and reduce the Fed's balance sheet -- which ballooned to more than $2 trillion during the crisis -- at the same time.

(BLS) - Regional and state unemployment rates were generally little changed in February. Twenty-seven states and the District of Columbia recorded unemployment rate decreases, 7 states registered rate increases, and 16 states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-one states and the District of Columbia posted unemployment rate decreases from a year earlier, 7 states reported increases, and 2 states had no change. The national jobless rate was 8.9 percent in February, little changed from January but 0.8 percentage point lower than a year earlier.

Rate sheet influential MBS coupons are outperforming their stagnating benchmark counterparts thanks to short covering and generally favorable technical conditions in TBA-land (more buyers than sellers!). The secondary market current coupon is 2.2bps lower at 4.147%. We're not sure how long this technical outperformance vs. benchmarks will last though. Treasury likely views this environment as the perfect time to offer up a chunk of their MBS portfolio.

(Reuters) - The U.S. Federal Reserve should complete its current round of bond-buying, designed to support the recovery, and likely does not need to extend it, Chicago Fed President Charles Evans said on Friday. "Following through on that to the tune of $600 billion, like we've said, I think is appropriate," Evans told reporters in a joint interview at the regional bank's headquarters. "I personally don't see as many needs for a further amount, as I probably thought last fall." Coming from one of the Fed's more dovish policymakers, Evans' statement suggests the Fed is unlikely to continue pouring new money into into the economy after June, when the current round of bond-buying is slated to end. In an hour-long, wide-ranging interview over pancakes and sausages, Evans said the economy was improving every month, inflation is stabilizing and moving upward, "in a direction that I think it needed to be," and the decline in the unemployment rate -- to 8.9 percent in February, from 9.8 percent in November -- was "genuine." But Evans also suggested that the Fed would not quickly move to tighten its extraordinarily loose monetary policy, and would likely try to keep its balance sheet steady once active bond-buying stopped. That would require the Fed to continue to reinvest proceeds of maturing securities in new purchases, as it has been done for some months now. He said he expected the recent rise in headline inflation to be transitory and expressed little concern that inflation will take hold. He also defended the need for continued policy accommodation. "I disagree completely with any characterization that these policies are dangerous," he said. "I think they are sound monetary policy decisions."