The most recent uptick in 10yr yields, despite occurring in "almost not enough to care" volume, broke the previously supportive ceiling for the afternoon, shifting the tone of the afternoon from "ground-holding" to something slightly less optimistic.

As long as 10's hold 2.20 or lower, it's not too troubling in the short term, and not-at-all troubling in the bigger picture, but MBS might be troubled enough to move below their 102-22 lows of the day in Fannie 3.5's. Even now, reprice risk feels a tad more elevated than it had been previously.

Nothing new here... no major drama.... just low volume leakage after hours, but such leakage has been known to increase reprice risks, even if it doesn't speak to broader trends.

Freddie Mac released today its U.S. Economic and Housing Market Outlook for March showing signs the housing market is awakening from its depression-like condition of the past few years and beginning, though slowly, to make a nascent recovery.

Outlook Highlights

* Stronger economic growth this year will translate into a further reduction in the unemployment rate below 8.3 percent.
* With stronger economic growth, home sales and originations forecasts have been revised upward.
* Expect 30-year fixed-rate mortgages to gradually increase throughout the year to about 4.5 percent.
* New rental construction for 2012 is likely to be the highest since 2005 if the current pace is maintained.
* Even with a 1 percent dip in new and existing homes sales in February, median sales prices moved up 0.3 percent on a year-over-year basis, a hint that home values may be stabilizing in more markets around the nation.

The 5yr Note Auction stopped through 0.013% higher than the 1pm "when-issued" yield--effectively the estimated stopping yield. That's the first negative aspect of the auction. The 2nd came in the form of a lower than average bid-to-cover of 2.85 vs recent averages of of 3.02.

Although we'd give 5's some grace due to the recent rally setting fairly aggressive yields in the context of the past week of trading, the result is far enough off the mark to put some pressure on bond markets. 10's and MBS looked like they'd hold up at breakeven levels on the day, but just ticked into negative territory. Fannie 3.5's are down 2 ticks at 102-26 and 10's are up a bp at 2.196.

Granted, there could be more "knee-jerk" left to play out, but the current move creates growing risks of negative reprices.

As with many components of fixed-income markets, 5yr yields have been in a whole new world since the fateful August 2011 FOMC Announcement when the "2013 verbiage" made it's debut. Further improvements and the long sideways grind left 5yr Auction stopping yields under 0.94 since the November auction. Only after the most recent sell-off have yields returned to a 1+ handle, though they're nowhere close to the 1.580 which was the last auction before August FOMC. Here's a brief history of stopping yields.

2/22/12 = 0.900
1/25/12 = 0.899
12/20/11 = 0.880
11/22/11 = 0.937
10/26/11 = 1.055
9/28/11= 1.015
8/24/11 = 1.029
7/27/11= 1.580


When-issued yields are currently trading around 1.04, and in the context of these past results, current yields offer some solace that the recent rally (or correction if you like) won't necessarily make today's take-down an impossible task. At least we hope that it won't.

We also wonder how long the recent winning streak can continue for 5yr auctions... They've been stellar over this time, stopping through at lower than expected yields every single month since September. That's great, but seeing as how it's the longest winning streak on record, it begs the question as to how long it will last (especially considering that 5yr auctions have historically been weak in the month of March).

Recent average bid-to-cover is 3.02 for the last 3 auctions and was 2.89 on 2/22.

(Reuters)Bank of America Corp's mortgage-related settlements cover a significant portion of the bank's potential losses, but the company still has more work to do, Chief Executive Brian Moynihan wrote in his annual letter to shareholders.

The second-largest U.S. bank has trailed its peers in recovering from the financial crisis because of losses and lawsuits tied to its 2008 acquisition of mortgage lender Countrywide Financial. In his letter, Moynihan strikes an optimistic tone, listing major settlements the bank has reached in an effort to limit its mortgage-related liabilities.

"Resolving these and other claims will take time, but we are moving through these issues aggressively and resolving them in the best interest of our shareholders -- settling when appropriate, and contesting them when we believe that is the right course," Moynihan wrote.

The letter was posted on the bank's web site on Wednesday as part of its 2011 annual report.