Following the auction, 10yr notes moved diagonally toward higher rates. Yields formed a triangle with higher lows and lower highs centered on the mid 3.47's. It was the bearish resistance trendline that broke first, and since that break, yields have moved sharply lower (sharp relative to previous trading), and are currently in the mid 3.45's. This levity in Benchmarks allowed MBS to get back to highs of the day, currently at 101-23 in FNCL 4.5's. Whereas we were recently in a position where any additional losses would have resulted in risks of reprices for the worse, we instead find ourselves BACK in the position where we're more likely to see reprices for the better.

We are NOT yet at levels in the FNCL 4.5 that warrant reprices for the worse, but we ARE at the "early warning" stage... An amber alert if you will... Reason being, MBS have held in an exceedingly linear trend channel all morning toward higher prices. Following a relatively weak auction, treasuries took a harder hit than MBS with 10's now up to 3.476. They've been battling to hold 3.48 support as the fail to break below the mid 3.46's. MBS finally conceded enough momentum to move out of their positive trend. Now there's a sideways battle for 101-20. Maybe it holds... maybe it doesn't... It doesn't much matter... If FNCL 4.5's go lower than 101-20, we might see small-scale reprices for the worse. The bigger picture guidance comes now from Friday's NFP. In short, auction supply has now been worked through with an uneventful result. MBS and Treasuries are on a losing streak that's epic in terms of consecutive days, but not-so-epic in terms of severity. Ultimately, auction did absolutely nothing to alter the longer term trends. We say: "yawn....." Bring on NFP. (caveat: this is still the early warning of a shift in momentum... If it materializes, we'll add emphasis)

(Reuters) - An inveterate Federal Reserve advocate of tighter financial conditions on Wednesday renewed his call for higher benchmark interest rates and shrinking the Fed's balance sheet to pre-financial crisis levels. "With the United States and many world economies experiencing ... growth and with the U.S. financial crisis over, I would expect to see a change in policy in which stimulus put in place at the height of the crisis would be throttled back," Kansas City Federal Reserve Bank President Thomas Hoenig said in prepared remarks to the London School of Economics. Hoenig is not a voter on the Fed's policy-setting Federal Open Market Committee this year. The Kansas City Fed chief has previously called for a modest increase in borrowing costs and expressed his opposition to the Fed's $600 billion bond buying program. His questioning of Fed policy adds to the voices of several other Fed officials who have in recent days called for the program to be scaled back or for the U.S. central bank to tighten financial conditions soon. (Reporting by Mark Felsenthal; Editing by Neil Stempleman)

***U.S. SELLS $29 BLN 7-YEAR NOTES AT HIGH YIELD 2.895 PCT, AWARDS 93.86 PCT OF BIDS AT HIGH ***7 yr NOTES BID-TO-COVER RATIO 2.79, NON-COMP BIDS $35.34 MLN *** PRIMARY DEALERS TAKE $12.12 BLN OF 7-YEAR NOTES SALE, INDIRECT $14.31 BLN

After yesterday saw some of the weakest levels in March, MBS and Treasuries have rallied in linear trend channels, even as the 7yr auction looms at 1pm. FNCL 4.5's are up 6 ticks on the day at 101-22 and 10yr notes are 3.35 bps better at 3.4554. We'll be tracking these trend channels and let you know if the supportive bearish lines (lower line in MBS, upper line in tsy yields) break, which would indicate the bullish trends are ending. At that point, we'd be watching for the establishment of a bearish trend, a re-entry into bullish trends, or a sideways range trade heading into Friday's NFP. It's possible we'll see a reprice for the better before or around the time of the auction.

(WSJ) - The same "too big to fail" firms that nearly brought down the financial system in 2008 have become bigger and more interconnected and continue to maintain an unfair advantage over smaller competitors, the departing bailout watchdog warned lawmakers Wednesday. In his last day as the special inspector general for the Troubled Asset Relief Program, Neil Barofsky cautioned a House panel that the federal bailout program mostly benefited Wall Street firms and fell far short in helping Main Street by encouraging greater lending or assisting enough homeowners with troubled mortgages. He also warned that the subsequent Dodd-Frank regulatory-overhaul law has "clearly failed" to damp market expectations that the government will bail out systemically important firms. Credit-rating firms continue to give large financial institutions higher credit ratings based on the existence of an implicit government backstop, while creditors in turn give those firms access to debt at a price that doesn't fully account for the risks created by their behavior, he said.

A plan unveiled yesterday by the Federal Deposit Insurance Corp. that would require a minimum 20 percent down payment for "qualified residential mortgages" would disrupt the housing market and jeopardize the economic recovery, according to the National Association of Home Builders (NAHB). "By mandating a 20 percent down payment on qualified residential mortgages, the Administration and federal regulators are excluding those without huge cash reserves – which constitutes most first-time home buyers and many middle-class households – from a chance to buy a home," said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. "Just do the math. First-time home buyers historically average 40 percent of home-buying activity. It would take an average family 12 years to scrape together a 20 percent down payment. This plan is nothing short of an assault on homeownership that could have a long-lasting negative impact on housing for generations to come."

Bob Nielsen, chairman of the National Association of Home Builders (NAHB) and a home builder from Reno, Nev., today issued the following statement on legislative proposals by Congressional leaders to effectively eliminate the role of the GSEs in the U.S. mortgage market: “The National Association of Home Builders strongly supports efforts to modernize the nation’s housing finance system, including reforms to the government sponsored enterprises Fannie Mae and Freddie Mac. We can’t go back to the system that existed before the Great Recession, but it is critical that any reforms be well-conceived, orderly and phased in over time. “Proposals announced today by key Republicans in Congress represent a piecemeal approach to reform that would disrupt the housing market and could push the nation back into a deep recession. These proposals, along with similar plans announced by the Obama Administration in February, show that many policy makers have clearly forgotten housing’s importance to the economy. “America’s home builders urge the Administration and Republicans in Congress to consider the potential consequences of their proposals. Congress needs to develop a workable housing finance system before it moves forward with policies that would further destabilize a housing market that is already struggling. Housing can be the engine of job growth this country needs, but it can’t fill that vital role if Congress and the Administration make damaging, ill-advised changes to the housing finance system at such a critical time.”

Overall, it's been a low volatility morning that has seen bonds gradually improve in a narrow trading range. But 10yr benchmarks have seen their first sign of resistance, having bounced 4 times on 3.47, and will need to get through that level in order

for the trend to continue. Yields are currently at 3.476 and FNCL 4.5's are up 4 ticks on the day at 101-19.