The STEADINESS and calm, methodical march higher in yield this afternoon is unnerving. No short/medium/long term technicals are shifting, and volume is too low to matter much. But despite the rationalizations, things have worsened enough for another round of reprices to be seen.

From just under 3.26 at 10AM, 10yr benchmarks have ridden a narrow trend channel that is finally encountering support at 3.32 / 3.33. 4.5's have declined as well, but in an even more narrow range and a gentler slope. 4.5's sit at 102-18, and seeing as how 102-21 marked the first reprice level, we're not in serious risk for widespread additions to that. This could change if 3.32 fails support significantly.

The U.S. economy needs a far better footing before the Federal Reserve reverses its current policy, and even more stimulus may be needed if the housing market hampers the rebound, a top Fed official said on Friday. Boston Federal Reserve Bank President Eric Rosengren, in his first speech of the year, again endorsed the U.S. central bank's massive bond-buying program as a way to boost a recovery that until only recently looked "anemic." "There will be a time when these aggressive actions need to be reversed, but first we need to get the economy on a much more solid footing," Rosengren, seen as well to the "dovish" end of the Fed's policymakers' spectrum, said housing was a key in deciding when the Fed would begin to reverse its stimulus plan. He added, "If housing-related growth is not going to boost the recovery this time around, we may need policy -- particularly monetary policy -- to continue playing a stimulative role," he said, adding housing was unlikely to provide as much support as in previous rebounds.

(Reuters) - Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday he was "very concerned" about the possibility that troubles in the municipal bond market could have broader effects. "I think there's some potential for broader distress there," Lacker said in response to questions at an event in Richmond.

Unfortunately the defensive nature we expected to see heading into this rates rally is becoming more obvious as we inch closer to the long weekend. Flows are very mixed and volume has really tapered off since the flurry of activity we enjoyed this morning, but it's clear there is an apathetic bias toward chasing this rally beyond the cluster of technical resistance that surrounds 3.28% to 3.30%. in 10s. Benchmark TSY yields are now drifting higher in an illiquid environment. The 10 year note is up to 3.317% after touching 3.257% just before 11am. The FNCL 4.5 is 7/32 off its morning high of 102-27. This might lead a few lenders to recall rate sheets. BEWARE

After hitting highs of the day just following Consumer Sentiment (102-27), FNCL 4.5's have fallen 6 ticks to 102-21. 6 ticks is sort of the baseline level of price loss in production coupons where lenders wouldn't be off-base to put out a small reprice. Of course, the shape of the morning trading is important here in that you'd want to adjust for the time pricing came out. Given that 102-27 was slightly peaky in the entire AM context, and that benchmark 10's resisted a cross of their pivot point as MBS hit 102-21, AND that there is a small but noticeable technical pivot in MBS prices from this morning when 4.5's first encountered resistance on the way up to 102-21, we'd probably err on the side of most lenders needing to see a bit more weakness before saying that majority consensus warrants reprice risk. Still... Crossing into 102-20 and below raises valid concerns, especially if benchmarks continue their post-10am trend channel higher in yield, thus breaking through their AM pivot.

Announced 12/23/2010: Fannie Mae routinely reviews all factors that affect its pricing and this assessment results in decisions to periodically make changes. These reviews and the resulting price changes ensure that Fannie Mae is positioned to provide a stable source of liquidity to its lender partners. As a result of recent review and analysis, Fannie Mae is announcing updates to the standard pricing requirements for mortgage loans with certain risk characteristics. See link for more info.

Although we're getting mixed reads on flows between the cash and futures market, price action implies buyers have backed away and profit takers are ringing the register after an early session data-driven bond market rally. Positive progress is still mostly in place though as fast money accounts are generally quiet. Reprices for the better have been reported.

Following the 9:55am consumer sentiment report, MBS FNCL 4.5's are holding near highs at 102-25 while benchmark 10's continue to grind into their own range-inspired resistance at lows in the 3.26's. Reprices for the better have been reported, but the market is showing itself to be extremely stubborn in signaling a broader shift and moving outside the January trend channel in 10's.

This is it... This is about as low as the 10yr note can be and still be considered in it's recent range. In fact, the range itself is broken at 3.28-ish. But it's been a noisy one under that. Furthermore, this assumes we're dealing with a horizontal range! It's now beginning to look like much more of a slightly sloped trend channel that's allowing for today's progressively lower yields at 3.25+'s but still providing resistance being a bullish boundary. We'll see how the rest of the day plays out, but so far, still frustratingly apathetic as far as the larger scale breakouts we'd like to see. Of course, we'll take the gains though! 4.5's are at 102-25 currently.

Source: Reuters

Following Industrial Production Data, we saw a nice directional move lower in benchmark yields and up in MBS prices. 3.29 quickly became 3.27, but so far, the story ends there. Is IP data on an auction week worth an immediate 2bp slight in 10's? and with increased volume? Of course not... But if it constitutes one of the last "gates" that needs to drop before a bullish leaning can break out, then you bet it does. 955am could be more exciting.

U.S. DEC CAPACITY USE RATE 76.0 PCT (CONS 75.6 PCT) VS NOV 75.4 PCT (PREV 75.2 PCT)

The much anticipated December Retail Sales report failed to match economist expectations and CPI data was "on the screws". These headlines were unable to motivate bond traders in either direction. The market's reaction was muted. The 10 year note is holding steady between 3.30 and 3.32%. Mortgages are trading lower and wider. The FNCL 4.5 is -3/32 at 102-18. We continue to search for signs of life in the bond market. The range trade persists....

U.S. DEC CPI YEAR-OVER-YEAR +1.5 PCT (CONS +1.3 PCT), EXFOOD/ENERGY +0.8 PCT (CONS +0.8 PCT) ||| U.S. DEC CPI YEAR-OVER-YEAR +1.5 PCT (CONS +1.3 PCT), EXFOOD/ENERGY +0.8 PCT (CONS +0.8 PCT) ||| U.S. DEC UNADJUSTED CPI INDEX 219.179 (CONS 219.022) VS NOV 218.803 ||| U.S. DEC CPI ENERGY +4.6 PCT, GASOLINE +8.5 PCT, NEW VEHICLES UNCH ||| U.S. DEC CPI FOOD +0.1 PCT, HOUSING +0.2 PCT, OWNERS' EQUIVALENT RENT OF PRIMARY RESIDENCE +0.1 PCT ||| U.S. DEC CORE CPI SEASONALLY ADJUSTED INDEX 222.187 VS NOV 221.982 ||| U.S. DEC REAL EARNINGS ALL PRIVATE WORKERS -0.4 PCT (CONS -0.2 PCT) VS NOV -0.1 PCT (PREV -0.1 PCT) ||| U.S. DEC CPI RISE LARGEST SINCE JUNE 2009 (+0.7 PCT)

US DEC RETAIL SALES EX-AUTOS +0.5 PCT (CONS +0.7 PCT) VS NOV +1.0 PCT (PREV +1.2 PCT) ||| US DEC RETAIL SALES EX-AUTOS +0.5 PCT (CONS +0.7 PCT) VS NOV +1.0 PCT (PREV +1.2 PCT) ||| US DEC RETAIL SALES EX-GASOLINE +0.5 PCT VS NOV +0.5 PCT ||| US DEC RETAIL SALES EX-AUTOS/GAS/BUILDING MATERIALS +0.2 PCT VS NOV +0.8 PCT ||| US DEC GASOLINE SALES +1.6 PCT VS NOV +3.8 PCT ||| US DEC CARS/PARTS SALES +1.1 PCT VS NOV +0.2 PCT ||| US RETAIL SALES +6.6 PCT IN 2010 VS. -6.5 PCT IN 2009 (Source: Reuters)

(Reuters) - World stocks extended losses and commodities remained under pressure on Friday after China's move to raise banks' reserve requirements fanned concerns that the key world growth engine may lose steam. The euro fell back from one-month highs against the dollar after earlier extending steep gains seen the previous day after European Central Bank chief Jean-Claude Trichet warned on inflation. Futures on the U.S. S&P 500 and the Dow Jones industrial average slipped around 0.4 percent, despite strong quarterly results from lender JPMorgan.

(Reuters) - China's central bank raised lenders' required reserves on Friday for the fourth time in just over two months, stepping up the fight against inflation that it has vowed will be a top priority for the year. By forcing banks to lock up more cash with the central bank, Beijing hopes to drain excess money from the economy and tame rising prices, which it worries may stir social unrest. The move, well anticipated after China's top leaders planted the task of taming inflation at the top of their agenda, underscores the central bank shift to "prudent" monetary policy in December, from its previous "moderately loose" stance.

(Reuters) - JPMorgan Chase & Co reported higher-than-expected quarterly earnings, helped by narrowing losses on bad loans that allowed it to release $2 billion in reserves. JPMorgan, the first of the major U.S. banks to report earnings for the fourth quarter, said profit increased to $4.8 billion, or $1.12 a share, from $3.3 billion, or 74 cents a share, a year earlier. Analysts on average expected $1 a share, according to Thomson Reuters I/B/E/S. Fewer bad loans meant the bank could reduce loan loss reserves for its credit card unit by $2 billion, or 30 cents a share after tax.