Benchmark 10yr notes are finding some support at a pivot point just above 3.34. Yields are currently at 3.3355. MBS are near their best levels of the day, now down only 3 ticks at 101-31. This should ease the weakness of the rate sheets not yet out this morning, but further gains would be needed for lenders already out with pricing to consider repricing for the better. Likely 102-02 would be needed, or extended stability at current levels or above.

U.S. house prices declined 0.3 percent on a seasonally adjusted basis from December to January, according to the Federal Housing Finance Agency’s monthly House Price Index. The previously reported 0.3 percent decrease in December was revised downward to a 1.0 percent decrease. For the 12 months ending in January, U.S. prices fell 3.9 percent. The U.S. index is 16.5 percent below its April 2007 peak and roughly the same as the May 2004 index level. The FHFA monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac. For the nine Census Divisions, seasonally adjusted monthly price changes from December to January ranged from -1.3 percent in the Mountain and South Atlantic Divisions to +1.6 percent in the West South Central Division. The overall index now stands at its lowest level since May 2004

*** RICHMOND FED COMPOSITE MANUFACTURING INDEX +20 IN MARCH VS +25 IN FEB *** RICHMOND FED MANUFACTURING SHIPMENTS INDEX +23 IN MARCH VS +29 IN FEB *** RICHMOND FED COMPOSITE MANUFACTURING INDEX +20 IN MARCH VS +25 IN FEB *** RICHMOND FED MANUFACTURING SHIPMENTS INDEX +23 IN MARCH VS +29 IN FEB *** RICHMOND FED SERVICES REVENUES INDEX +14 IN MARCH VS +11 IN FEB

(WSJ)- Sales of previously owned homes fell sharply in February, setting the stage for steep discounting in the spring market. The National Association of Realtors reported Monday that existing home sales dropped 9.6%, and the median price, $156,100, was the lowest since February 2002. The silver lining, say economists, is that bargain prices, coupled with low interest rates, might finally spur some buyers off the fence as the real-estate industry prepares for its busiest season. Even without the $8,000 federal tax credit that stoked sales last spring, industry watchers predict a larger number of transactions this year. "The job market is getting better and that will make people feel more confident about their income-earning prospects," said David Berson of the PMI Group. "You need that confidence to buy a house. Household formations are also very important. ... Kids may have moved back in with their parents, or two people may have moved in together, because of job concerns. Now they can move into their own place." Overall, February's weakness could have been driven by bad weather, deals canceled over lowball appraisals and a higher number of distress sales, according to the National Association of Realtors. A third of transactions were all-cash sales, and investors accounted for 19% of February sales activity, down from 23% in January. Low prices in many markets also reflect a new reality as sellers finally give in and reduce the asking prices on their homes in hopes of a fast deal. "After three years of the housing downturn, people are becoming much more realistic in terms of valuing their homes," said Lawrence Yun, the National Association of Realtors' chief economist.

FNCL 4.5's are 6 ticks lower on the day at 101-27. This is as low as they've been since 3/14. 10yr notes are also battling their 1 week lows (or "highs" in terms of yield) which coincide with yesterday's battle for support just under 3.356. The pre-Japanese Earthquake yields are just over 3.356. This weakness comes early enough in the day that rate sheets will certainly be worse than yesterday.

(FT) - Portugal faces an imminent political crisis that could force the government to resign, trigger a snap election and make an international financial rescue inevitable, according to government ministers and opposition leaders. The minority Socialist government is almost certain to be defeated on Wednesday in a parliamentary vote on a new austerity package, leaving José Sócrates, the prime minister, with little alternative but to resign. Portugal faces an imminent political crisis that could force the government to resign, trigger a snap election and make an international financial rescue inevitable, according to government ministers and opposition leaders. The minority Socialist government is almost certain to be defeated on Wednesday in a parliamentary vote on a new austerity package, leaving José Sócrates, the prime minister, with little alternative but to resign. Pedro Passos Coelho, leader of the centre-right Social Democrats, the main opposition party, rejected a government offer for talks on the measures on Monday night, saying an early general election was “inevitable”. Luís Amado, foreign minister, accused opposition parties and the government of “playing dice” with the Portuguese economy and making a snap election two years ahead of schedule increasingly probable. The austerity measures are designed to calm nervous financial markets where Portugal’s borrowing costs have soared to what the government acknowledges are unsustainable levels.

(Reuters) - UK Inflation surged to a 28-month high of 4.4 percent last month, reviving speculation that the Bank of England will not wait much longer to raise interest rates. The Office for National Statistics said consumer price inflation rose to 4.4 percent in February from 4.0 in January, higher than the 4.2 percent forecast by economists. Housing costs, domestic heating bills and clothing prices were largely to blame. Retail price inflation, a broader measures which is used as a starting point for many wage negotiations, rose to 5.5 percent from 5.1 percent, its highest since July 1991. Six of the Bank's nine-member Monetary Policy Committee voted to keep rates on hold in February, while three voted for a rise from a record-low 0.5 percent. A voting breakdown for the BoE's March meeting is published on Wednesday. Those MPC members in favour of keeping rates steady last month saw inflation falling sharply next year without big rate rises, and were concerned an unexpected sharp fall in fourth-quarter output may presage an extended period of below-par growth.

(Telegraph) - The two crew members on the F-15E fighter jet both ejected and are said to have minor injuries. One has already been recovered by US forces, who say they are in the process of rescuing the other. It is understood that at least one of the crew members was initially rescued by rebel Libyan soldiers after ejecting from the aircraft. The crashed plane was discovered by a Telegraph journalist reporting in and around Benghazi, the rebel-held city. It is thought the F-15E fighter jet came to ground after suffering a mechanical failure. The US military confirmed that one of its jets had crash landed but said that it had not been shot down. Vince Crawley, a spokesman for the US military's Africa Command, said that one crewman had been recovered and one was "in process of recovery". Both crew members suffered minor injuries. Crawley said the crash occurred "overnight." He declined to give the location of the incident and also would not say how the rescued crewman was picked up.

*** FED'S PIANALTO SAYS EXPECTS US RECOVERY TO CONTINUE AT A MODERATE PACE *** FED'S PIANALTO SAYS ENERGY, COMMODITY PRICES CURRENTLY GENERATING UPWARD PRESSURE ON INFLATION *** PIANALTO SAYS EXPECTS INFLATION PRESSURE FROM COMMODITIES, ENERGY TO BE TRANSITORY *** PIANALTO - SEEING CLEARER SIGNS OF A "VIRTUOUS CYCLE" OF GROWTH *** PIANALTO-EXPECT ECONOMY TO EXPAND AT SLIGHTLY ABOVE-AVERAGE GROWTH RATE OF ABOUT 3 PCT A YEAR *** FED'S PIANALTO - HOUSING MARKET A DRAG ON GROWTH *** PIANALTO-EXPECT UNDERLYING TREND IN BROAD CONSUMER PRICES TO RISE GRADUALLY TOWARD 2 PCT BY 2013 *** PIANALTO- INFLATION EXPECTATIONS STABLE *** PIANALTO- SHARP RISE IN ENERGY COSTS ASSOCIATED WITH UNREST IN MIDDLE EAST, AFRICA A KEY RISK FACING THE ECONOMY

FED'S FISHER - WE ARE SEEING NOW THAT FREE MONEY ENCOURAGES SPECULATION*** U.S. ECONOMY PROPELLING FORWARD ON ITS OWN *** DOUBT THAT ROLE OF U.S. DOLLAR IS GOING TO CHANGE *** GREATER DANGER IS FOR CENTRAL BANK TO MONETISE GOVERNMENT DEBT, WOULD BE ROAD TO ECONOMIC DESTRUCTION *** U.S. HOUSING SECTOR IS GOING TO BE DEPRESSED FOR QUITE SOME TIME *** BUT HOUSING SECTOR WILL NOT HOLD US BACK FROM ECONOMIC RECOVERY ***Today 05:33 - FED'S FISHER - EXPECT GROWTH OF ABOUT 3.5 PCT THIS YEAR IN U.S. ***CURRENT FISCAL PATH WOULD MAKE U.S. INSOLVENT, WE ARE AT TIPPING POINT *** FISCAL CONSOLIDATION IS GOING TO BE VERY PAINFUL

(Reuters) - Forces loyal to Muammar Gaddafi attacked two Libyan towns on Tuesday after a third night of air raids on Tripoli, but the Western campaign faced questions over the future of its command structure. With anti-Gaddafi rebels struggling to create a command structure that can capitalize on the air strikes against Libyan tanks and air defenses, Western nations have still to decide who will run the operation once Washington pulls back. The United States will cede control of the air assault in days, President Barack Obama said, even as divisions in Europe fueled speculation that Washington would be forced to continue leadership of air patrols to replace the initial bombardment. "We anticipate this transition to take place in a matter of days and not in a matter of weeks," Obama, facing questions at home about the U.S. military getting bogged down in a third Muslim country, told a news conference on a visit to Chile. In the latest fighting on Tuesday, Gaddafi forces used tanks to shell the rebel-held western city of Misrata and casualties included four children killed when the car they were traveling in was hit, residents told Reuters. The death toll on Monday had reached 40, they said. "The situation here is very bad. Tanks started shelling the town this morning," a resident, called Mohammed, told Reuters by telephone from outside the city's hospital, adding: "Snipers are taking part in the operation too. A civilian car was destroyed killing four children on board, the oldest is aged 13 years."