The attached infographic was created by the Obama Administration to illustrate the largest contributors to the budget deficit. In the months ahead we expect debate on the budget deficit to intensify which will undoubtedly lead to questions on cutting entitlements such as Social Security, Medicare and Medicaid. National Defense spending is also a target for deficit trimming. All four of these topics are expected to stir up controversy and potentially civil unrest in the process.

We're getting into yield levels in 10yr notes that have limited technical resistance information ahead. The long term horizontal level is near 3.57, but we're not close enough to that yet to assess whether or not it remains significant. So we're left either evaluating horizontal levels based on yesterday's strongest marks or a diagonal trend of improving yields that connects the lows from the 9th and 11th. So far, the lowest yield from yesterday is holding as horizontal resistance as 10's recently reversed at 3.60 and are currently back at 3.61. The diagonal resistance, however, isn't much lower, at 3.59 A break below that would certainly be significant if seen with volume and suggest a test of 3.57. FNCL 4.5's are near their highs, currently at 100-27.

U.S. DEC BUSINESS INVENTORIES +0.8 PCT (CONSENSUS +0.7 PCT) VS NOV +0.4 PCT (PREV +0.2 PCT) *** BUSINESS SALES +1.1 PCT VS NOV +1.4 PCT (PREV +1.2 PCT) *** INVENTORY/SALES RATIO 1.25 MONTHS' WORTH VS NOV 1.25 MONTHS *** INVENTORIES $1.44 TRILLION, HIGHEST SINCE JAN 2009 ($1.46 TRILLION); SALES $1.148 TRILLION, HIGHEST SINCE SEPT'08 ($1.154 TRILLION)

JOBLESS RATE HAS DECLINED A BIT RECENTLY BUT JOB CREATION REMAINS ANEMIC *** OVERALL ECONOMY GRADUALLY IMPROVING BUT STILL FACES HEADWINDS FROM HOUSING, WEAK INCOME GROWTH *** PACE OF ECONOMIC GROWTH WILL CONTINUE TO BE MODERATE THIS YEAR

February 15, 2011 - Builder confidence in the market for newly built, single-family homes remained unchanged at 16 for a fourth consecutive month in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. "While builders are starting to see more interest among potential home buyers, we are also dealing with a multitude of challenges, including competition from foreclosure properties and inaccurate appraisals of new homes, which are limiting our ability to sell," said NAHB Chairman Bob Nielsen, a home builder from Reno, Nev. "On top of that, an extremely tight lending environment continues to make it almost impossible to obtain credit for viable new and existing projects, and most do not see that situation improving anytime soon." On a positive note, two out three of the HMI's component indexes edged slightly upward in February. The component gauging current sales conditions improved by two points to 17, while the component gauging sales expectations in the next six months rose a single point, to 25. Meanwhile, the component gauging traffic of prospective buyers held unchanged, at 12. On a regional basis, HMI scores were mixed in February, with gains reported in two parts of the country and declines in two others. The Northeast registered a two-point gain to 22, the South posted a one-point gain to 18, the Midwest posted a one-point decline to 12 and the West posted a two-point decline to 13.

In the past few minutes, 10yr notes have broken lower past the short term pivot point at 3.63. There's resistance ahead at 3.61, but in the context of this morning's recent range, this is a significant break lower. FNCL's are improved as well, with 4.5's currently hovering around 100-27. These gains are enough to see lenders who are already out with rates release reprices for the better, assuming these levels hold steady or higher for a while ("a while" varies from lender to lender, could be half an hour or several hours from case to case).

FNCL 4.5's had been sort of "stuck" in a 100-22 / 100-24 range following econ data, but have since ticked up to 100-25 / 100-26, just a tick off from yesterday's high. But further progress may be limited by benchmark 10's current battle with the 3.63 pivot. This has been a really pertinent line in the sand since Friday and yields are currently having a tough time getting lower.

Remember how bad December for the bond market? Well...December Treasury International Capital (TIC) data was released today. The TIC report tracks the flow of Treasury and agency debt securities in and out of the U.S on a monthly basis. We generally don't focus on individual months as a broader barometer of demand, but December was a rough month for rate watchers, so this data is of extra interest. Here is a quick recap: Net foreign purchases of U.S. Treasury bonds and notes was $54.6bn in December vs. $ 61.70bn in November. Not a huge drop off at all, suggesting the quick jump in interest rates was exaggerated by illiquid holiday trading conditions. China’s holdings of U.S. Treasury securities fell a modest $4bn to $891.6bn. This was the 2nd consecutive month of cuts made by China but still well above the 12 month low seen in June 2010 (843.7bn). Japan’s U.S. Treasury holdings increased for the 7th straight month, this time from $877.2bn in November to $883.6bn December. The U.K. recorded a sizable uptick in its holdings from $511.8bn in November to $541.3bn in December. U.K. TSY debt holdings increased in 11 of 12 months in 2010. Russia reported the largest reduction of U.S. Treasury securities, trimming its holdings from $122bn to 106bn.

The 10yr note yield had been as high as 3.66 prior to the release of several economic reports this morning. FNCL 4.5's touched 100-19. Since the release of the data at 8:30am, the 10yr is at 3.64 and FNCL 4.5's at 100-22 versus 5pm levels of 3.62 and 100-24 respectively.

NY FED'S EMPIRE STATE BUSINESS CONDITIONS INDEX +15.43 IN FEB (CONSENSUS +15.00) VS +11.92 IN JAN *** EMPLOYMENT INDEX AT +3.61 IN FEBRUARY VS +8.42 IN JANUARY *** NEW ORDERS INDEX +11.80 IN FEBRUARY VS +12.39 IN JANUARY *** PRICES PAID INDEX +45.78 IN FEBRUARY VS +35.79 IN JANUARY *** SIX-MONTH BUSINESS CONDITIONS INDEX +49.40 IN FEBRUARY VS +58.95 IN JANUARY *** BUSINESS CONDITIONS INDEX AT HIGHEST SINCE JUNE 2010*** PRICES PAID INDEX AT HIGHEST SINCE AUGUST 2008

JAN IMPORT PRICES +1.5 PCT (CONS. +0.8 PCT) VS DEC +1.2 PCT (PREV +1.1 PCT) *** EXPORT PRICES +1.2 PCT (CONSENSUS +0.7 PCT) VS DEC +0.6 PCT (PREV +0.7 PCT) *** PETROLEUM IMPORT PRICES +3.4 PCT VS DEC +4.3 PCT *** YEAR-OVER-YEAR IMPORT PRICES +5.3 PCT, EXPORT PRICES +6.8 PCT *** NON-PETROLEUM IMPORT PRICES +1.1 PCT, LARGEST SINCE APRIL 2008; YEAR-OVER-YEAR +3.2 PCT *** IMPORT PRICES UP 4.3 PCT OVER PAST 3 MONTHS, LARGEST 3-MONTH GAIN SINCE JUNE 2009 *** AUTO IMPORT PRICES +0.5 PCT, LARGEST RISE SINCE DEC 2007

US JAN RETAIL SALES +0.3 PCT (CONSENSUS +0.6 PCT) VS DEC +0.5 PCT (PREV +0.6 PCT) *** EX-AUTOS +0.3 PCT (CONS +0.5 PCT) VS DEC +0.3 PCT (PREV +0.5 PCT) *** EX-GASOLINE +0.2 PCT VS DEC +0.4 PCT *** GASOLINE SALES +1.4 PCT VS DEC +1.8 PCT *** CARS/PARTS SALES +0.5 PCT VS DEC +1.5 PCT ***