Good Morning. Happy Friday.

Inflation data has been released. It was "on the screws".

No unexpected's in this data, thus permitting an extension of positive rates progress. The recent range has been broken, we are poking and prodding at new resistance levels...YAY!!!

 The FN 4.0 is +0-09 at 97-19 yielding 4.229%. The FN 4.5 is +0-09 at 100-21 yielding 4.438%. The secondary market current coupon is 4.428%.

The benchmark 10 year note has broken 3.71% resistance.  The 3.375 coupon bearing 10yr TSY note is +0-15 at 97-15 yielding 3.684%.  This was the first stop on our list of "positive progress" resistance levels. For progress to continue we need 10s to bust through 3.68%.

RATE SHEETS WILL BE BETTER TODAY

Yesterday I wrote about the much needed EXPLICIT GUARANTEE on FN/FRE MBS. This is what I said....

Given the already weak outlook for loan originations in 2010, it sounds like its going to take a major downturn in housing for the Fed to extend the MBS Purchase Program. One thing is for sure though, in order for the MBS market to continue providing funding for loan originators, the US government will have to EXPLICITLY guarantee agency MBS cash flow investments.

We get a look into President Obama's plan in February when he releases his 2011 Budget. More to come on why MBS market supply and demand dynamics make it very possible for the Fed to exit the MBS purchase program in March.

By explicit guarantee I mean there is a line item on the Federal Budget that allocates funding for Agency MBS guarantees. At the moment, the current GSE prospectus does not have that...CHECK OUT THE FIRST PAGE

WELL...last night the CBO released THIS on their blog.

"Despite having a unique legal status and a long history linking them to the federal government, Fannie Mae and Freddie Mac have been considered private firms owned by their shareholders. However, with the entities facing substantial losses that threatened their solvency, the government took control of Fannie Mae and Freddie Mac through its authority under the Housing and Economic Recovery Act of 2008 (HERA). The federal government now exercises an extraordinary degree of management and financial responsibility over them. CBO believes—consistent with the principles outlined in the 1967 Report of the President’s Commission on Budget Concepts—that it is appropriate and useful to policymakers to account for and display the entities’ financial transactions alongside other federal activities."

GSE ARE NOT EXPLICITLY GUARANTEED UNTIL THEY ARE A LINE ITEM ON THE FEDERAL BUDGET. UNTIL THEN THE GUARANTEE IS IMPLIED...