Both MBS and Treasuries have weakened a bit more after initially finding some support at 101-23 and 3.46 respectively. FNCL 4.5's are currently at 101-21 and 10yr notes at 3.468. If a lender has not yet released a reprice for the worse, they are more and more likely to do so as this weakness persists.

Increase the risk level one more notch as the highs-of-the-day support for 10yr notes at 3.446 were just broken and the uptick in yields is looking directional. FNCL 4.5's have fallen to their lows of the day, and Bill Gross was just on CNBC saying he'd like to see lower bond prices. It's a 1-2-3 punch that, at this point, is LIKELY to result in reprices for the worse.

Immediately following the release of the Beige Book, benchmark yields moved higher, from just below 3.43 to 3.438. The latter is a support level which needs to be watched carefully at the moment as it may currently be breaking. Yields initially bounced there and looked as if they would move lower. But now yields are on the rise again, moving to 3.444. MBS have shown the first signs of making their own move for the worse as FNCL 4.5's ticked down from 101-26+ to 101-25. The last vestiges of benchmark support are very near current levels with the highest yield seen this morning at 3.446. We're basically there now, and if that support breaks, reprices for the worse become more likely as long as MBS adjusts to match the curve. At any rate, the current weakness elevates our risk levels, even if reprices for the worse are not guaranteed, they are now possible.

A successful handoff from public to private credit creation has yet to be accomplished, and it is that handoff that ultimately will determine the outlook for real growth and stability. Because quantitative easing has affected all risk spreads, the withdrawal of nearly $1.5 trillion in annualized check writing may have dramatic consequences. Who will buy Treasuries when the Fed doesn’t? The question really is at what yield, and what are the price repercussions if the adjustments are significant. To visualize the gaping hole that the Fed’s void might have, PIMCO has produced a set of three pie charts that attempt to point out (1) who owns what percentage of the existing stock of Treasuries, (2) who has been buying the annual supply (which closely parallels the Federal deficit) and (3) who might step up to the plate if and when the Fed and its QE bat are retired. The sequential charts 1, 2 and 3 are illuminating, but not necessarily comforting. See the link below...

*** FED'S BEIGE BOOK SAYS U.S. ECONOMY CONTINUED GROWING AT MODERATE PACE IN JANUARY, EARLY FEBRUARY *** FED SAYS RETAIL SALES INCREASED IN ALL 12 REGIONAL BANK DISTRICTS AS 2011 BEGAN *** FED SAYS MANUFACTURERS REPORT GREATER ABILITY TO PASS THROUGH HIGHER COSTS TO CUSTOMERS *** FED SAYS SOME RETAILERS HAVE ALREADY RAISED PRICES OR INTEND TO DO SO IN NEXT FEW MONTHS *** FED SAYS WAGE PRESSURES 'MINIMAL' BUT MANUFACTURERS, RETAILERS SAY OTHER COSTS RISING *** FED SAYS HOME SALES, CONSTRUCTION ACTIVITY LOW, SOME DISTRICTS SEE PICKUP IN COMMERCIAL REAL ESTATE SALES *** FED SAYS LENDING STANDARDS STILL TIGHT, JOB MARKETS IMPROVING MODESTLY *** FED'S BEIGE BOOK PREPARED BY ATLANTA REGIONAL BANK AND BASED ON DATA COLLECTED ON OR BEFORE FEB 18

The Fed will release the Beige Book, a compilation of anecdotal information and data on current economic conditions across the country. The findings are NOT THE VIEWS OF FEDERAL RESERVE OFFICIALS...instead, each Federal Reserve bank interviews key business contacts, economists, market experts, and other sources in their specific district. When the Beige Book was last released we summed up its message with the following headline, "Housing is Weakest Link. Wage Growth Missing. Margin Squeeze Looms". We don't expect to hear much newness when it comes to the housing market but wouldn't be at all surprised if residential lending standards were reported as "tighter". On the whole, we'd expect the large non-skilled portion of the unemployed labor force to keep wage pressures low. The wage growth story is one of gains in productivity and a large pool of unemployed workers who are willing to work for cheaper. Specialized workers could make a case for wage bumps though. Onto the margin squeeze. The Beige Book will update us on the debate among goods producers. TO PASS ALONG HIGHER PRICES OR NOT? Rising food and energy prices combined with increasingly expensive production input costs do not mix well with anemic wage growth and high unemployment rates. Restaurants are certainly struggling with the idea of changing their menus. See what we mean by hard to pass along higher costs? Practical perspective always helps. We hope to learn that jobs for skilled workers are in demand though....that just won't be enough to energize the economy though. Long, slow, recovery. Gotta get educated to innovate and use technology.

The previously noted 3.423 pivot point broke recently, giving way to higher yields. The 10yr note is currently at 3.429 after recent highs of 3.435. FNCL 4.5's fell to 101-26 very close to the 101-25 level at which we might first risk reprices for the worse. These match the lowest levels seen in the last hour and a half. The nearness to reprice risk levels increases our level of defensiveness heading into the 2pm release of the Beige Book.

On average among the five major lenders, loan pricing is 9.7bps better than it was yesterday...AFTER reprices for the better were awarded. It's interesting to see rebate improve given sideways to slightly lower movement in production MBS prices. What gives? Tighter primary/secondary loan pricing spreads! Secondary desks have reduced the amount of margin that was baked into rate sheets. Presumably to provide some pricing stability for fence-sitting borrowers. Anything to stimulate activity....phones have been quiet on lock desks lately. Anyway, since lenders have already priced aggressively vs. MBS indications today, it's gonna take a little bit extra rally to see reprices for the better. FNCL 4.5s at 102-05 is where we'd hope to see a few recalls. Of course these observations are based on the behavior of the five majors. It is quite possible that your local or regional funding source is operating under different considerations.

Stocks bounced hard off their lows just after the noon hour. This coincided with 3 distinct bounces for treasury yields at 3.409, their lowest levels of the day. As stocks rally off those lows, bond yields have been dragged higher, and MBS prices dragged lower. The damage isn't severe though, FNCL 4.5's are still in the middle of their range today, currently at 101-27. We're seeing some supportive hints in 10yr notes based on a pivot point separating this morning's trading range and recent high yields. More simply, 3.42's were the low end of the range earlier today, then yields broke lower and are now revisiting. Was a floor, now maybe a ceiling... If 10's hold that pivot point, MBS should be able to hold their mid-range as well.

10yr notes just made their first definitive movement outside the trendline that had been providing resistance so far today. Yields are currently at 3.414 and FNCL 4.5's have risen to 101-28. The stock lever could provide additional benefit to the bond market if stocks continue to fall. The S&P failed to break through a pivot-point near 1314 and have been selling off since. The index is now negative on the day, and although not 100% correlated on the day, bonds have been doing a reasonable job of following the stock market this morning.