10yr yields are currently at 3.492 after holding 3.490 as "last line of defense" support previously. FNCL 4.5's are teetering on the edge of dangerous territory, now at 101-13. 1 tick lower puts them back in decidedly risky territory for late day reprices, and once again it's possible an "itchy trigger finger" lender might reprice for the worse here, but with a lower low set previously in the day, it's not likely to be a widespread phenomenon.

The last lines of defense for short term technicals in benchmark bonds were at 3.49 in line with yesterday's high yield. That's where 10yr notes got a bounce recently, which translated to a 101-12 bounce for FNCL 4.5. Although we did indeed see some of the "itchy trigger finger" lenders reprice for the worse, the risks that additional lenders will do so is now decreasing and/or completely gone with 4.5's currently at 101-16+

TURMOIL IN MIDDLE EAST LESS LIKELY TO BE A PROBLEM FOR US ECONOMY THAN DEBT CRISIS IN EUROPE *** DON'T EXPECT REMOVAL OF FISCAL STIMULUS TO HAVE BIG IMPACT ON ECONOMY *** FANNIE, FREDDIE WERE A SERIOUS SOURCE OF PROBLEMS THAT CAUSED RECESSION, HAVE TO BE DEALT WITH

3.48 had been discussed as one of the more important support levels in benchmark 10yr notes and it is currently being tested with yields up at 3.487. FNCL 4.5's have fallen a few ticks from support at 101-15, now at 101-13. With reprice risk levels specifically laid out at 101-12, the risks are escalating and reprice for the worse may be seen from the normal group of fast-acting lenders.

*** SAYS HE SUPPORTED JAN FOMC STATEMENT BECAUSE HE DIDN'T WANT TO UNDERMINE FED CREDIBILITY *** EXPECTS INFLATION TO ACCELERATE TOWARDS 2 PCT OVER THE COURSE OF THE NEXT YEAR *** -BEGINNING TO SEE SOME INCREASING PRICE PRESSURES *** -LIKELY MUCH OF RISE IN GLOBAL COMMODITY PRICES DRIVEN BY INCREASED GLOBAL DEMAND *** - EXPECT BUSINESS SPENDING TO CONTINUE AT HEALTHY PACE *** - SIGNS THAT LABOR MARKET IMPROVING, BUT UNEMPLOYMENT RATE WILL DECLINE ONLY GRADUALLY *** SEES UNEMPLOYMENT RATE AT 8.5 PCT BY END 2011, 7-8 PCT BY END 2012 *** -DANGEROUS TO RELY ON MONETARY POLICY TO SOLVE "SO MANY OF OUR ECONOMIC CHALLENGES" *** -EXPECT HIGH INVENTORY LEVELS TO RESTRAIN HOME PRICES, RESIDENTIAL CONSTRUCTION A WHILE LONGER *** SAYS APPEARS FEARS OF DEFLATION HAVE LARGELY ABATE

10yr notes had been on the rise after the 5yr note auction. As we'd said before the auction, we'd be looking for pivot-based support in the high 3.45's, and that's essentially what we're seeing: yields grinding around 3.46. 3.48 is the bigger deal however, and if we see yields fail to hold at this support, that would likely be the next stop. MBS, on the other hand, have been relatively stronger since 1pm. FNCL 4.5's are currently right on their 1pm level of 101-17. The potential support-holding in treasuries, and the strength in MBS make reprices for the worse an almost non-existent risk.

$35 BLN 5-YEAR NOTES AT HIGH YIELD 2.190 PCT, AWARDS 31.65 PCT OF BIDS AT HIGH *** 5-YEAR NOTES BID-TO-COVER RATIO 2.69, NON-COMP BIDS $96.26 MLN *** PRIMARY DEALERS TAKE $20.30 BLN OF 5-YEAR NOTES SALE, INDIRECT $11.93 BLN

Employers took 1,534 mass layoff actions in January involving 149,799 workers, seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month, the U.S. Bureau of Labor Statistics reported today. The Mass Layoff Statistics (MLS) program collects reports on mass layoff actions that result in workers being separated from their jobs. Each mass layoff event involved at least 50 workers from a single employer. The number of mass layoff events in January increased by 51 from December, and the number of associated initial claims increased by 11,807. In January, 341 mass layoff events were reported in the manufacturing sector, seasonally adjusted, resulting in 39,189 initial claims; both figures increased over the month Eleven of the 19 major industry sectors in the private economy reported over-the-year declines in initial claims, with manufacturing having the largest decrease. The six-digit industry with the largest number of initial claims in January 2011 was temporary help services.

For some time now, it's been exceedingly common for bonds to weaken a bit heading into a treasury auction, especially the security in question and those near it. So with today's 5yr auction, past precedent informs us that there's a risk of a slight weakening heading into the auction, but no so today! 10's are at 3.442. Even so, there's a risk we could see some weakening in the next 30 minutes, but it would have to contend with pivot based support at 3.45+. FNCL 4.5's are currently up 3 ticks on the day at 101-16

On average among the five major lenders, C30 loan pricing is 14.5bps better today with the largest gains seen on note rates below 4.75%. Rebate at 5.00% is 12.3bps better on average while 4.875% quotes are 12.6bps better. These improvements are in-line with current MBS indications.

WASHINGTON, Feb 23 (Reuters) - Fannie Mae and Freddie Mac will soon begin collecting punitive compensation from mortgage servicing companies that fail to properly handle troubled mortgage loans, the regulator of the two government-controlled firms said on Wednesday. "The enterprises will be moving forward with servicer penalties for last year in the coming weeks," Edward DeMarco, acting director of the Federal Housing Finance Agency said in prepared remarks to a conference of mortgage bankers in Dallas, Texas. A copy of his remarks was posted on the FHFA website. (Reporting by Corbett B. Daly; Editing by James Dalgleish) (

With production coupons hitting local highs, originators have been locking up loans. This has led to a modest uptick in loan supply hedging in the TBA MBS market. Choppy price action has been the resulting impact of said loan sales. Loan locking illustrates the naturally defensive bias we've been referencing. On a good note, when benchmark TSY prices fell on profit taking just a few minutes ago, short covering was noted shortly thereafter which implies bullish momentum is picking up a little more steam.

This micropost was intended to redirect your attention to an MBS Commentary post. We've outlined important inflection levels and pivot points that must be overcome if the mortgage rate rally is to continue. Our "Best Execution" mortgage rate target is 4.875% until trading liquidity improves for 4.0 MBS loan production. READ MORE...