Across all operations in the schedule shared in the link below, the FRBNY's Trading Desk plans to purchase approximately $97 billion in Treasuries over the course of the next month. This represents $80 billion in purchases of the announced $600 billion purchase program and $17 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-February and mid-March. Compare that to a total of $112 billion in last month's QEII open market operations. The reduced amount of planned purchases reflects slower MBS prepay speeds.

In terms of the impact of the soon to be released GSE Reform White paper on the MBS market and current coupon valuations...This "headline event" has already been leaned on as motivation for fast money day traders who need an axe to grind. Yield spreads are indeed wider into lower prices today so the implied headline risk will likely be pointed to as the reason behind it. Lower and wider hasn't been uncommon lately though. We are afterall just teetering on a snowball selling driven event that would firmly push the production MBS coupon up to 5.00% and lead "Best Execution" mortgage rates higher (5.375%). READ MORE ABOUT THE SHIFT IN PRODUCTION COUPONS...

FNCL 4.5's are now down 9 ticks on the day at 99-31+, their lowest point of the day. 10yr notes, in contrast, have put in a bit of a showing of support just under 3.72 and are now back at 3.704. Reprices for the worse have come across from several lenders and more will likely join them shortly.

In a matter of minutes, MBS prices have fallen to the lows of the day after the Treasury Budget report. 10yr notes have also broken through their previous support level just over 3.693 and are currently at 3.712. FNCL 4.5's are now down 6 ticks on the day at 100-03. This puts us at risk to see reprices for the worse, even from lenders who recently came out with reprices for the better.

A round of profit taking in the bond market has led Treasury yields higher and pressured production MBS coupon prices back to intraday lows. Reprices for the worse are possible.

US JAN BUDGET DEFICIT $49.80 BLN VS $42.63 BLN JANUARY DEFICIT IN FY 2010 - TREASURY *** US JAN BUDGET DEFICIT IS SECOND BIGGEST JAN BUDGET DEFICIT ON RECORD (JAN '09 $63 BLN) *** 2011 DEFICIT TO DATE IS $419 BLN VS $431 BLN SAME PERIOD IN FY 2010 *** RECEIPTS $227 BLN VS $205 BLN IN JAN 2010; OUTLAYS $276 BLN VS $248 BLN IN 2010 *** This is the second largest deficit on record for the month of January.

More reprices for the better are trickling in following the 30yr auction, not because it was a rousing success, but rather, because it wasn't an abysmal failure. This "warm bowl of porridge" result was "good enough" to keep 10yr note yield's pivot point intact today. That has fostered some ongoing stability in the bond market and some small gains in MBS. FNCL 4.5's are currently improved 1 tick on the day at 100-09. 10yr yields are on the cusp of breaking a bullish indicator by POTENTIALLY ticking into the 3.65's. That's the short term indicator though. Extending the time frame pins 3.636 as the key mid-term resistance.

On Thursday, February 10, 2011, the Mortgage Bankers Association (MBA) submitted the attached comment letter to Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) calling for an extension of the Home Affordable Refinance Program (HARP) that allows underwater borrowers who loans are owned by Fannie Mae and Freddie Mac, and who are current on their mortgages, to take advantage of the current low interest rates to refinance their loans. MBA recommends that the program, currently slated to expire at the end of June, be extended to the end of December, 2012 to coincide with the expiration of the Home Affordable Modification Program (HAMP).

Treasury just sold $24 billion 4.75% coupon bearing 30 year bonds. No headline observations can be made on this one. It was a pretty average auction. The non-dealer award totaled 51.0%. Indirects accounted for an above average 43.1% of that award while directs took down the remaining 7.9%. Indirect bidders did ramp up their participation in terms of total bids tendered ($9.4bn vs. previous $6.9bn) and their award was a bit bigger than usual, but demand was not earth shattering by any means. At 2.51 bids submitted for every 1 accepted by Treasury, the bid to cover ratio was barely below both the five and ten auction averages. Buyers weren't willing to pay up for this issue either. The auction "high yield" was 1.10 basis points above the 1pm "When Issued" yield, which is the bond markets forward pricing mechanism for future Treasury issues. This implies investors were more willing to buy these bonds at lower prices and higher yields, as dictated by apathetic demand. The new long bond as priced the risk free 30 year "par value" coupon at 4.75% vs. the previous 4.25% coupon

The plurality of the reprice notice above may be a bit misleading as we've only seen one from one lender thus far. MBS being "near highs" also comes with a caveat of those highs only being 4 ticks away from the lows. Narrow range.... Stable range.... In both MBS and treasuries! The previously discussed pivot has continued to hold and 10yr notes are currently at 3.671. We've also potentially been given a bit of information as to the lower end of today's yield range with a break below 3.66 being the line in the sand to consider today a rally.

Short covering is boosting Treasury prices and production MBS coupons are tagging along for the ride. The FNCL 4.5 MBS coupon has just broken out of a tight sideways intraday channel and is now testing our 100-05 resistance pivot. Yesterday pre-auction short covering was a sign of a strong auction to come. While this behavior is not as aggressive as it was yesterday, it is a potential indication that traders may be preparing for a post auction rally today. $16 billion 30 year Treasury bonds will be sold at 1pm

Kevin Warsh announced his intent to resign as a member of the Board of Governors of the Federal Reserve System on or around March 31, 2011. Governor Warsh, a member of the Board since February 2006, submitted his letter of resignation to President Obama today. "Kevin rendered the Federal Reserve and the nation exemplary service during his time at the Board," Federal Reserve Board Chairman Ben S. Bernanke said. "In particular, his intimate knowledge of financial markets and institutions proved invaluable during the recent crisis. And he worked energetically and effectively behind the scenes overseeing the operations of the Board and the Federal Reserve System. I deeply appreciate his insights and wise counsel and, most especially, his fortitude and friendship during the difficult days, nights, and weekends of the crisis." PERSPECTIVE FROM THE NY TIMES: In recent months, Mr. Warsh has at times distanced himself from Mr. Bernanke, who has pushed the Fed to take extraordinary measures to speed the recovery. Five days after the Fed’s policy-making arm voted on Nov. 3 to buy $600 billion in Treasury securities — the second round of a strategy intended to lower long-term interest rates — The Wall Street Journal published an op-ed article by Mr. Warsh expressing considerable doubt. Though Mr. Warsh voted for the bond-buying plan — by Fed tradition, members of the board almost never vote against the chairman — he said he considered the strategy a “necessarily limited, circumscribed and subject to regular review,” and added, that “policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize.”

After falling to 100-03 earlier this morning, FNCL 4.5's have gone no lower. They also haven't gone any higher than the 100-05's, making this a very quiet morning during that time. The broader bond market, as benchmarked by the 10yr tells the story: there has been an excessive amount of testing of a pivot point that spans 3.68-3.69. We've even seen yields tick into the 3.69's at times, but never enough to suggest or confirm that they were breaking higher. These levels are one of those "one man's ceiling is another man's floor" market movements that we often refer to as "pivot points." The significance is that yields have shown a predisposition to bounce here, whether approaching from the top or bottom. That means that if yields went higher, they might meet resistance on the way back down. But most importantly, a significant break above the pivot is a worthwhile market signal; one that usually coincides with lock/float strategy, (assuming a nominal connection between MBS and bond market in general).

As you can see in the char below...the recovery bounce failed to hold. (Read 99-32 as 99-31+)