MBS prices are in roughly the same territory as the last update, though there's been some volatility in between. Fannie 4.0's are down 8 ticks on the day at 102-25 and 10yr notes are just under 7 bps higher on the day at 2.384. Even without economic data since 830am and with the auction/FOMC still looming, volume has been borderline epic, superseding what we'd normally see on a high volume NFP day in 2011. The biggest story may turn out to be in stocks where S&P's are having a hard time getting through an important short term technical level near 1150. We'd advocate not putting to fine a point on the exact pivot level given the wide range of movement. Yesterday S&P's got as high as the upper 1151's before a big bounce back down. They're currently at 1148.29. Failure to break is likely to be bond-market-positive. Just keep in mind the morning's technical track-record can change quickly after the 1pm Auction or 2pm FOMC Announcement.

(Reuters) - Standard & Poor's Ratings Services will be examining the ratings of U.S. states and local governments in the context of federal funding cuts, a rating agency official said on Tuesday. Steve Murphy, a S&P managing director, said more specifics were needed on the cuts, which won't be known until later this year. "Where are the actual reductions going to be? Where will they hit and when?," Murphy told Reuters. (Reporting by Karen Pierog; Editing by James Dalgleish)

(Reuters) - The United States faces one-in-four odds of slipping back into recession, and a weaker economic outlook is raising the likelihood the Federal Reserve will soon do more to boost growth, a Reuters poll shows. The world's biggest economy is still expected to pick up in the second half of the year as it shakes off high gasoline prices and factory disruptions created by Japan's earthquake in March, according to the monthly survey of more than 70 economists. But recession fears have risen substantially in recent weeks. Stocks on the S&P 500 .SPX plunged more than 6 percent on Monday after Standard & Poor's downgraded U.S. sovereign debt late on Friday, further threatening consumer confidence. Just two weeks ago, economists saw the chances of another recession at one-in-five. Now they see it at one-in-four. Just two weeks ago, economists saw the chances of another recession at one-in-five. Now they see it at one-in-four. The poll, taken as world stock markets staged their biggest fall since the dark days of the financial crisis in 2008, showed lower growth expectations for the rest of this year. Analysts slashed forecasts for the third quarter, bringing down the consensus by 0.8 percentage point to an annualized 2.3 percent, from 3.1 percent in the July poll. "Weak stock markets, negative wealth effects and weak labour markets ... mean we're not going to see a quick recovery in the second half of the year," said Mark Miller, senior international economist at Lloyds Banking Group. Thirty-five of 41 analysts who participated in the August and July polls have downgraded their forecasts for Q3 GDP. Of the 13 primary dealers who contributed to this poll and the previous poll, all but one has downgraded their forecast. While 2.3 percent growth would be an improvement over the paltry 1.3 percent growth in the second quarter, it would still indicate a vulnerable economy.

Fannie 4.0's are currently 7 ticks lower on the day at 102-27. 10yr Treasuries however, are 24 ticks lower in price, bringing the yield up nearly 8 bps to 2.39. Yes, you read that right, but it bears repeating: "the 10 yr yield ROSE almost 8 bps to 2.39." Fun times... Contributing to the backtracking: EU Peripheral CDS are a bit lower as the ECB goes through similar liquidity pumping motions as the FED. Certainly, the current extent of losses in bond markets wouldn't even need to be chalked up to headlines and events overnight given the extent of yesterday's snowball. Some interesting highlights from the overnight session: stock futures have been absolutely insanely volatile. Things got downright scary when S&P's hit 1080 in the wee hours. They spiked almost up to 1150 before settling into the 1120's currently. Adding insult to injury, S&P affirmed France's AAA rating overnight, (payback for years of "surrender" jokes). And the WSJ notes that "a parallel is seducing Wall Street bankers and investors: 2011 as a repeat of 2008." Sounds awfully familiar, but perhaps that's old news now. Trying to wrangle the bucking bronco will be today's 3yr note auction results and the 2pm FOMC announcement. Between now and then, it's anybody's guess. Well, it's probably anybody's guess after those events as well, but at least there's a chance for some logical connection between the data and market reaction. The trading range in MBS has been reasonably tight this AM meaning fewer and lesser delays on rate sheets this AM versus yesterday.

(Reuters) - U.S. nonfarm productivity fell less than expected in the second quarter, government data showed on Tuesday, while a moderation in the pace of unit labor costs growth suggested inflation pressures will remain contained. Productivity slipped at a 0.3 percent annual rate, the Labor Department said, after falling at a revised 0.6 percent pace in the first quarter. Economists had expected productivity to drop at a 0.8 percent rate. Revisions to prior quarters showed productivity growth was slightly stronger in 2010 than earlier reported. The slowdown in productivity mirrors a sharp slowdown in economic growth during the first half of the year, which has raised fears the economy could slide into recession. The economy grew at a 1.3 percent annual rate in the second quarter after a meager 0.4 percent rise in the January-March period. Normally, a slowdown in productivity implies that businesses have to add new workers to meet production, but against the backdrop of weak economic growth, it suggests businesses might have to cut costs to protect profits. Productivity -- which measures hourly output per worker - grew rapidly as the economy emerged from the 2007-09 recession, peaking at an 8.0 percent growth rate in the second quarter of 2009. The gains were driven by companies' cutting costs, particularly for labor. The productivity report showed unit labor costs grew at a 2.2 percent rate in the second quarter, which was slower than the 4.8 percent pace in the first quarter. Revisions showed unit labor costs contracted more sharply in 2010 than previously estimated. Economists had expected unit labor costs to rise 2.3 percent in the second quarter. (Reporting by Lucia Mutikani, Editing by Andrea Ricci)