January delivery Fannie and Freddie 30 year fixed MBS coupon have begun the settlement process and it will soon look like MBS prices just plummeted (more than they already did today). HOW DOES THIS AFFECT LOAN PRICING? You won't notice the effects tomorrow. Lenders have been building loan pricing based on the February coupon for several weeks already. Lenders must roll earlier because secondary desks are lower in the MBS supply chain and need to deliver their closed loans to investors with enough time to allow for post-closing/pre-purchase review.

FNCL 4.5's are right in the middle of the reprice risk zone we highlighted this morning as the likely indicator to see a second round of reprices - 102-18. We're a bit disconnected from benchmarks at the moment with the illiquidity from the roll compounding widening spreads.

Let's keep this simple... The last time today that 4.5's hit 102-18, 10 yr yields were at their worst levels of the day around 3.366. Currently however, treasuries are at a balmy 3.3434, illustrating how MBS price and treasury yield movements can vary in terms of relative correlation. Widening spreads after 10's short covering rally are contributing to this phenomenon compounded by illiquidity in the Class A MBS market. We may be in for reprices for the worse from lenders that haven't been aggressive with them already today.

While he did not directly address how long the Fed may need to keep its ultra-loose monetary policy, Kocherlakota - who is a voting member this year on the Fed's policy-setting panel - suggested the recovery has a long way still to go. Headwinds to recovery remain, he said. Many banks still hold assets that went bad during the recession, and are more focused on building their own capital than on lending. And consumers, hit by a decline in land prices that trimmed household wealth, continue to be hesitant to spend.

(Reuters) - Aggressive action by the U.S. Federal Reserve helped ensure a faster recovery than otherwise from the worst recession in decades, but growth remains short of the pace needed to sharply cut the unemployment rate, a top Fed official said on Tuesday. "The recession has had and will continue to have a large and persistent impact on the U.S. economy," Minneapolis Fed President Narayana Kocherlakota said in remarks prepared for delivery in Madison, Wisc. "Nonetheless, it is clear to me that the recession and its subsequent recovery would have been significantly worse in the absence of the actions of the Federal Reserve."

With relatively less trading action than normal in MBS, we turn to benchmarks more than we otherwise would to gauge impending directionality. 10yr Tsy's are now trading within two distinct pivot points that were set up in Friday's Post-NFP Rally. The first low yield point for the rally at 3.3661 saw a major pull-back on Friday (above 3.4). That marks the highest point reached in yields today (pivot point). On the rebound, 10's stopped out at the next yield level reached on NFP day after bonds continued to rally. That's a 3.32 yield in 10's, which has turned away ralling yields both today and on Friday, as well as marking Friday's closing levels. Market says auctions have more work to do if they're to prove yields are justified trading any lower than that, but are willing to offer support for 3.3661 on the high side. This marks the short term range for the rest of the day and a breakout on either side can indicate a shift is at hand (yields break 3.3661 and reprice risks increase vs breaking 3.32 which would correspond to a more bullish view)

The 3-year note auction didn't tell us anything new about the market's bias toward lower or higher yields. Demand metrics were average on all fronts. We are however seeing a post auction rally as stocks sell and TSY short positions are covered. Although it is encouraging to see shorts covered at 3.36% support in 10s, we don't take this behavior as a sign of better rates to come. We still have to get through 10s tomorrow and the long bond on Thursday before re-accessing the market's willingness to drive yields lower.

1.027% High Yield (1.038 WI yields at 1pm) 3.06 Bid-to-cover. 39% taken by indirects vs 16% direct. Market reaction thus far is inconclusive to weaker, not strong enough to motivate a rally. Not weak enough for immediate retest of high yields. But probably weak enough to spook a few lenders into reprices for the worse.

Currently the "When Issued" 3 year note is yielding 1.033% vs. the "On the Run" 3-year note yield of 0.978%. This implies the 3-year auction has not seen great demand yet. However we must point out that dealers tend to wait until the last second to submit bids. If they don't show up, the post-auction reaction could be quite negative.

As you look at today's charts, it is very important to keep the y-axis in mind as it covers 102-21 to 102-29. This is an uncommonly narrow range for MBS trading as was yesterday's sideways action. This visually exaggerates the losses, making them seem more epic than they really are. With the 10yr still under 3.37, we're still under a key inflection point that bonds reached following Friday's NFP, a pretty nominal concession before an auction week.

Pre-auction price concessions are pushing benchmark yields higher and pressuring rate sheet influential MBS coupon prices lower. Reprice risk is rising quickly. We've already heard of a few lenders recalling AM rate sheets. $32 billion 3s go off at 1pm.

10 minute totals in treasury futures shortly after 10am rose to surpass yesterdays highest readings, indicating volume is returning to the market and pushing yields back up to their weaker levels that followed Friday's NFP rally. MBS, however, continue to hold at 102-26 diminishing risks of reprice for the worse.

(WSJ) Charles Plosser, president of the Federal Reserve Bank of Philadelphia, suggested that he wasn't prepared to mount a strong opposition to the Fed's controversial bond-buying program, even though he wasn't supportive of the policy. "I wish we hadn't done it but that doesn't mean I want to stop it right now," Plosser said in an interview with the Wall Street Journal before a speech today in Philadelphia.

U.S. NOV WHOLESALE SALES +1.9 PCT (CONSENSUS +1.5 PCT) VS OCT +2.6 PCT (PREV +2.2 PCT). sales, however, were up 1.9% versus a 1.5% consensus, though still down from October's +2.6% mark. Stock/Sales ratio is down slightly from 1.17 to 1.15 months. The headline decline i s the first since 12/2009, but it's possible that the market discounts this potential weakness due to an overbuilding of inventories that is now leveling off. The fact that sales were at their highest point since 9/2008 supports this. (Source: Reuters)

For lenders who priced early, the first risks of reprices for the worse are developing. 10yr notes are up sharply in yield to 3.34 following the stock market open and 7am data. 4.5 MBS are down to 102-26. In and of itself, this is not justification for reprices, but with the rapidity of the recent benchmark move and with auctions looming, there is an element of risk in the market even at this early hour. If 4.5's hit 102-22 those risks will pick up, and reprices would be all but guaranteed if we hit 102-17/19 by some chance. On the upside, reprices for the better are likely to be more dependent on auction results and should require 4.5 prices over 103-00.

(Reuters) - It is unlikely that the U.S. Federal Reserve's current $600 billion bond-buying plan played a roll in recent upticks in the "real economy," Philadelphia Fed President Charles Plosser said on Tuesday morning. He added that the second round of "quantitative easing" purchases, known as QE2, may have had an effect on the financial markets, since they began in November. But it "stretches things," he said, to argue it has affected recent unemployment numbers and data on sales and spending.

S&P shot up to 1276 at the open, but has moderated somewhat in the last 30 seconds. Now will be the time to watch 10's to see if they too moderate as it's not a given that the stock lever will be highly correlative all morning. Treasuries may have to discount themselves a bit for a pre-auction concession, but whether or not that could take 10's out of yesterday's range is a bit dubious considering they're not up to bat today. Current yield is 3.310, MBS 4.5's are off their highs of 102-30 in thin trading, now back at 102-28.

Bonds drifted into stronger and stronger territory yesterday afternoon, but did so in progressively lower volume. The volume was so low enough that if yields were weighted according to volume, the 3.30 to 3.33 range was maintained all day. This morning, treasuries came out of the gate with a 3.31 yield and have since moved into the 3.30's. That's fine territory considering anything other than a sell-a-thon is more confirmation that Friday wasn't a knee-jerk reaction. MBS 4.5's are at 102-28, but have not traded much since due to the impending settlement.

ALERT: Class A MBS, which consist of Fannie and Freddie 30-year coupons, will begin the settlement process today. That means prices will seem to drop this afternoon. However this is generally a non-event for loan originators as the roll is already accounted for in loan pricing as lock desks have been building rate sheets based on February coupons for several weeks now. READ MORE: http://www.mortgagenewsdaily.com/mortgage_rates/blog/187633.aspx

LISBON (Reuters) - Portugal has no plans to seek a bailout from the EU and IMF, and the government is doing everything possible to avoid doing so, Finance Minister Fernando Teixeira dos Santos said. Portugal is widely seen by economists as the country that is most likely to follow Greece and Ireland in seeking outside help with its finances to take it out of the firing line of the widening euro zone debt crisis. FULL STORY: http://www.reuters.com/article/idUSLDE70A0IP20110111

TOKYO (Reuters) - Japan will purchase euro zone bonds to bolster confidence in the European Financial Stability Facility as the euro zone struggles with a prolonged debt crisis, Japan's finance minister said on Tuesday, boosting the euro. FULL STORY: http://www.reuters.com/article/idUSTOE70A03620110111

The International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index slid 3.2% in the week ended Saturday from the week before on a seasonally adjusted, comparable-store basis, ending four consecutive weeks of growth. "Although sales fell sharply during this past week, the week-over-week decline probably was exaggerated by the seasonal adjustment given a low volume week," ICSC Chief Economist Michael Niemira said. "More importantly for January, retailers should see some improvements over the next few weeks as consumers redeem their gift cards throughout the month." On a year-on-year basis, the reading rose 3.5%, relatively steady from the prior week. For January, ICSC expects overall chain store sales will increase by around 2.5%, and there is expected to be less gift card redemption this year compared with last.

More from the Release.."Thirteen (13) percent (seasonally adjusted) reported unfilled job openings, a four point improvement that anticipates a reduction in the unemployment rate in the coming months. Over the next three months, 10 percent plan to increase employment (up one point), and nine percent plan to reduce it (down three points), yielding a seasonally adjusted net six percent of owners planning to create new jobs, a two point gain from December and the best reading in 27 months. Until sales picks up, there is no pressing reason to hire. The reduction in the payroll tax will add some impetus to hiring as most of that addition to take home pay will likely be spent. http://www.nfib.com/Portals/0/PDF/sbet/sbet201101.pdf

From the Release..."The Index of Small Business Optimism lost 0.6 points in December, dropping to 92.6, not a huge change but not the hope-for rebound that would signify more growth in the small business sector. Apparently, the “management change”in Washington and marginally better retail sales numbers were not enough to pump up spirits at the New Year celebrations. This marks the 36thmonth of recessionary levels. Only once in that period did the Index get above 93 (last month) and has been below 90 for 26 months." http://www.nfib.com/Portals/0/PDF/sbet/sbet201101.pdf