*** - U.S. TREASURY SAYS ESTIMATES $19.2 BLN OF COUPON SECURITIES HELD BY PUBLIC MATURING ON APRIL 15 *** US TO SELL $32 BLN 3-YR NOTES APRIL 12, $21 BLN REOPENED 10-YR APRIL 13, $13 BLN REOPENED 30-YR BONDS APRIL 14, TO SETTLE APRIL 15 *** U.S. TO SELL $32 BLN 3-MONTH, $30 BLN 6-MONTH BILLS APRIL 11, TO SETTLE APRIL 14

Traders paradise so far this morning as both stocks and TSYs are range trading. It took 10yr yields a while to capitulate to the most recent run up in stocks, but as soon as it looked like S&P's might be making support bounces in the 1336-1337 range, 10yr yields moved higher quickly and may soon test their highest levels of the day. Currently, 10's are at 3.572. FNCL 4.5's have fallen to 101-08, making reprices for the worse possible, more so if these levels persist or get worse, but an early risk now nonetheless.

After testing yields slightly above the 3.56 technical target, 10yr notes fell to 3.54, but have met resistance there. The initial rally was fueled by short-covering, which itself was was sparked by a well-connected stock lever this morning. The bounce at 3.54 came just after stocks reversed from their lows. Now that shorts are covered, we could see some more disconnection in the stock lever. MBS have been choppy this morning and lagging treasuries a bit, as per usual into a mild rally. There's no major significance to the big spikes seen in MBS charts this morning as the impending roll makes for fewer trades hitting the screens to smooth out the curve. FNCL 4.5's are currently up 3 ticks on the day at 101-12.

One important purpose of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is to reform the securitization of financial assets in the U.S. To that end, the legislation requires the federal banking agencies, the Securities and Exchange Commission, the Secretary of Housing and Urban Development, and the Federal Housing Finance Agency (“the Agencies”) to jointly issue regulations to require securitizers to retain an economic interest in a portion of the credit risk for residential mortgages that they use to collateralize asset-backed securities. Dodd-Frank requires the Agencies to exempt securities from this requirement that are backed only by loans with low default risk that meet a Qualified Residential Mortgage (QRM) standard. The Agencies must jointly define what constitutes a QRM “taking into consideration underwriting and product features that historical loan performance data indicate result in a lower risk of default.” To help the public consider the definition set forth in the recently published Notice of Proposed Rulemaking (“NPR”) that would implement the risk retention provision of Dodd-Frank, this data release provides historical data on loan volumes and ever-90-day delinquency rates of mortgages purchased or guaranteed by Fannie Mae or Freddie Mac (“the Enterprises”). http://www.fhfa.gov/webfiles/20686/QRM_FINAL_ALL.pdf

Yesterday we explored the potential impacts on mortgage lending that would arise if the government does shut down tomorrow. Suntrust released the following guidance last night: Tax transcript: If the IRS is on furlough, we will not be able to obtain tax transcripts. If you have a registered/locked loan with us and have not already delivered it to the branch, please upload your completed and signed 4506T into eMagic TRIO now. Even though the TRIO folder will not contain a complete file, please upload your registration or lock confirmation and select "deliver to Underwriting." You will need to check the audit trail in TRIO to confirm receipt by SunTrust Mortgage. We will order the transcripts prior to the shutdown to minimize a potential delay when you deliver your loan file. • Flood insurance: Borrowers may have difficulty obtaining flood insurance through FEMA during this period. • FHA: We understand that HUD may not support FHA Connection during their hiatus, and therefore we will not be able to order case numbers or perform other functions in FHA Connection while they are on furlough. • Rural Housing: We are not sure of the impact to GUS since that system was created since the last shutdown in 1995. However, we should anticipate the system will not be available. In addition we will not be able to get conditional commitments during the shutdown. • VA: We should anticipate that the system by which VA appraisals are ordered will not be available.

(Reuters) - The Federal Reserve should keep its fed funds target rate very low for a long time and complete its asset purchasing program as scheduled, Cleveland Federal Reserve Bank President Sandra Pianalto said on Thursday. In a speech in Rome, Pianalto said she saw no evidence that sharp rises in food and energy prices would lead to lasting inflation, though the Fed is "watching carefully" for any signs of an unanticipated spillover. "My outlook for economic growth and inflation assumes that we complete our asset purchase program as originally scheduled, and keep our federal funds rate target at exceptionally low levels for an extended period," Pianalto said. The Fed's current $600 billion asset purchase program is scheduled to end in June. "I don't expect recent rises in food and energy prices to cause a broad spillover into a wide array of consumer prices, or in other words a lasting increase in inflation," said Pianalto, who is not a voter on the Fed's policy-setting Federal Open Market Committee this year. "Specifically, I expect the underlying trend in broad consumer prices to rise only gradually toward 2 percent by 2013."

Following the release of Jobless Claims, bonds expressed some indecision, but have since rallied back to yesterday's closing levels in benchmark 10's and are 2 ticks better versus yesterday in FNCL 4.5's. There's no other scheduled economic data this morning. If these gains hold, lenders that came out with rates before 8:30am may reprice for the better.

(Reuters) - Large financial firms should be allowed to fail or they will continue to take excess risks that lead to crises, Richmond Federal Reserve President Jeffrey Lacker said on Thursday. Lacker said a very proactive response to the financial crisis, while stabilizing the situation in the short-term, has simply expanded the government's implicit safety net to nearly two-thirds of the financial system. That raises the chances that such companies will continue to have unfair advantages and not adequately prepare for possible losses on their investments because they expect the government to step in when troubles arise. "It is not clear that recent reforms have succeeded at closing the gap or limiting the safety net," Lacker told students at an event sponsored by Ferrum College. Fed Chairman Ben Bernanke and other top regulators have argued that the Dodd-Frank financial reform law have largely solved the problem of banks that are considered too big to fail by giving the authorities the ability to wind down those firms. A council of regulators that includes the Fed, the Securities and Exchange Commission and others is soon expected to designate a number of firms as explicitly too large to be allowed to go fail -- and impose tougher regulatory requirements on them. http://www.reuters.com/article/2011/04/07/usa-fed-lacker-idUSDZE7DS00V20110407

(WSJ) - Why is the European Central Bank raising rates while the Federal Reserve isn’t? There are a lot of reasons, but one big one: The U.S. has a whole lot more spare capacity — in terms of unemployment workers, idle factories, empty offices and stores — than Europe. Measuring the gap between an economy’s current output and its potential output if it were at full employment is tricky, even treacherous. The history of measuring these output gaps accurately is awful, and relying on faulty estimates has led central banks astray. But the concept remains a key part of modern central banking. The larger the output gap, the theory goes, the less likely inflationary pressures are to emerge. Economists at Goldman Sachs — relying on government, OECD and their own calculations — say: “The output gap is larger in the US (at around 6% of GDP) than it is in the Euro-zone, Japan and the UK (each between 3% and 4% of GDP).” http://blogs.wsj.com/economics/2011/04/07/mind-the-output-gap/

Interest rates are still trending higher and equities are catching a bid this morning after the European Central Bank announced a hawkish shift in monetary policy. The ECB this morning raised interest rates by 25 basis points to 1.25 percent in its first hike since July 2008 to offset inflationary pressures in the eurozone. From the ECB: At today’s meeting the Governing Council of the ECB took the following monetary policy decisions: 1. The interest rate on the main refinancing operations of the Eurosystem will be increased by 25 basis points to 1.25%, starting from the operation to be settled on 13 April 2011. 2. The interest rate on the marginal lending facility will be increased by 25 basis points to 2.00%, with effect from 13 April 2011. 3. The interest rate on the deposit facility will be increased by 25 basis points to 0.50%, with effect from 13 April 2011. The ECB's interest rate hike was expected. Eurozone inflation rose 2.6% year-over-year in the latest read, and the bank responded by saying "strong vigilance is warranted with a view to containing upside risks to price stability." The move makes the ECB the "first of the developed world's major central banks to initiate a cycle of raising rates," according to the Wall Street Journal.

*** US JOBLESS CLAIMS FELL TO 382,000 APRIL 2 WEEK (CONSENSUS 385,000) FROM 392,000 PRIOR WEEK (PREVIOUS 388,000) *** US JOBLESS CLAIMS 4-WK AVG FELL TO 389,500 APRIL 2 WEEK FROM 395,250 PRIOR WEEK (PREVIOUS 394,250) *** US CONTINUED CLAIMS FELL TO 3.723 MLN (CON. 3.700 MLN) MARCH 26 WEEK FROM 3.732 MLN PRIOR WEEK (PREV 3.714 MLN) *** US INSURED UNEMPLOYMENT RATE UNCHANGED AT 3.0 PCT MARCH 26 WEEK (PREV 3.0 PCT) *** US CONTINUED CLAIMS LOWEST SINCE OCT 2008