Good Morning. Happy Ash Wednesday to practicing Catholics and others of Christian faith.

Benchmark yields moved lower yesterday as market participants weighed Fed speak against the effects of the stock lever and new sovereign debt developments. We labeled this rally "shallow" as trading volumes were WELL BELOW average thanks to snow cover in the mid-atlantic region and holiday in China. Price movements were generally a function of short covering and some pre-options expiration positioning. Overall, while headline writers did their best to tie price volatility to economic fundamentals, yesterday's trade was not indicative of any specific market event.

The 3.625% coupon bearing 10 year Treasury note went out the door +0-08 at 99-22 yielding 3.663%. The FN 4.0 ended the session +0-07 at 98-05 yielding 4.177% while the FN 4.5 was +0-06 at 101-03 yielding 4.379%. The secondary market current coupon was 4.349%. The CC yield was 68.6 bps over the 10 year TSY note yield and 59 bps over the 10 year swap rate. "Rate sheet influential" MBS coupon yield spreads outperformed benchmark yields on the day but moved off early session tights late in the afternoon.  The 2s/10s curve was 1bps steeper at 286bps. The Dow was up 1.68% while the S&P was +1.8%.  Financials and energy stocks led the rally as the dollar weakened against a basket of currencies, pushing oil up 3.98%.

NOTE: Yesterday was Notification Day for Class C MBS coupons. That means Ginnie MBS coupon prices fell as February coupons began the settlement process. We are now watching March GNs. READ MORE ABOUT SETTLEMENT

Most of yesterday's gains were lost in the overnight session as stocks abroad were bid higher.  Again we call attention to light market participation as a reason for added price volatility...but do respect the stock lever as a formidable opponent for the bond market. 

The US session begins with housing and industrial production data. First out: Housing Starts and Building Permits.  Housing Starts came in +2.8% at 591,000 (expected at 580,000). Building Permits were -4.9% to 621,000 (expected at 620,000).  Ground breaking improved in January..likely a function of really poor weather in December vs. less poor weather in January. The same excuse cannot be relied upon for permits though....instead we point out the fact that home builders remain generally defensive about getting too excited for a recovery in housing. Until the labor market improves and home supply (plus shadow inventory) stabilizes...we dont need anymore homes! (we do need affordable rental units though)

Here is a table summarizing the data. Progress continues to be choppy. Two steps forward, one step back

The Fed released Industrial Production data at 9:15am. The market was anticipating an improvement of 0.70%...it got +0.9%.  Capacity Utilization was on the screws at 72.6%. For the most part, econ data has not been bond market friendly today. Just about all positive progress has been lost in 10s at this point in the morning.

The 3.625% coupon bearing 10 year Treasury note is -0-11 at 99-12 yielding 3.702%. 10s find support at 3.71% and run into resistance at 3.66%.

 Mortgages have retraced yesterday's gains as well. The FN 4.0 is -0-07 at 97-29 yielding 4.201% and the FN 4.5 is -0-05 at 100-29 yielding  4.401%. The secondary market current coupon is now 4.371%. The CC yield is +66.7bps over the 10 year TSY note and +57.4 over the 10 yr swap rate.  The FN 4.5 has found support at 101-00...the next inflection point is 100-24. A move that low would warrant reprices for the worse from lenders.

Nothing has changed our outlook for the long end of the yield curve. We still believe "rate sheet influential" benchmark traders will sell into strength. We still support the concept of a new range at higher yield levels (10s between 3.57 - 3.85).

The dollar is stronger against the Euro. Oil is still bid higher and stocks have opened +0.30% in the green. Rate sheet rebate will be worse today. Remember: thinly traded markets can bring about more price chopatility than usual. There is much more to come in the day ahead, including FOMC Minutes and a HAMP update. Given the market's recent focus on the health of housing, look for this data to get more attention than usual. 

Just got THIS email from the FHFA on New Goals for Fannie and Freddie.