Everything had been building up to the biggest potential market mover of the week: today's FOMC Announcement and subsequent press conference. But with those events having come and gone without ruffling the market's feathers too much, the last two days of the week take on renewed importance. That notwithstanding, they contain some important economic data anyway, as well as the last Treasury auction of the week tomorrow. The 830am time slot is busy, containing first quarter preliminary GDP and Jobless Claims on the econ data front, as well as Fed-Speak from Elizabeth Duke at the Community Affairs Research Conference in Arlington, VA. Pending Home Sales hits at 10am, followed by Fed-Speak from Lockhart at 12:40 and then the afternoon biggie: the 7 yr Treasury Auction results. With us as always will be the Fed Balance Sheet and Money Supply reports at 430pm. For a look at what Friday will add to that, as well as an overview of the rest of the week's economic events, see the link below.

One of the benefits if the previously mentioned narrow trading range in MBS today is that it's not too much to ask for prices to move from one extreme to the other. That's what has happened over the past 20 minutes as FNCL 4.5's moved from 102-10 to 102-14. Similarly, 10yr notes are down to 3.355 from their weakest levels of the day at 3.37. This effectively eliminates what had been a potentially increasing risk that we'd reach prices under 102-10 which could have prompted reprices for the worse.

A window into the Fed's decision making process perhaps... Although this could be well-inferred from previous verbiage and policy decisions, as far as the dual mandate of inflation and labor markets, Bernanke is making no pretense about which of those two components is in focus these days. In two separate parts of the Q&A, there were important comments that linked the separate mandate components as interdependent. When questioned about zero inflation, he responded: "Attempting to maintain inflation at zero will increase the risk of experiencing an extended bout of deflation or falling wages and prices, which in turn can lead employment to fall below its maximum sustainable level for a protracted period. The goal of zero inflation is not consistent with the Federal Reserve's dual mandate." Later in the session, he noted that "long term unemployment is the worst it has been in the post-war period," further saying that it is a "very significant concern" and "the reason the Fed has been so aggressive." This is a firm suggestion that developments in the labor market will continue to be the primary concern for the Fed and the primary driver of ongoing policy. the pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole. We are still something like 7 million plus jobs below where we were before the crisis and so clearly the fact that we are moving in the right direction, even though that is encouraging, doesn't mean that the labor market is in good shape. Obviously, it is not. We are going to have to continue to watch and hope that we will get stronger and increasingly strong job creation going forward."

With the exception of the initial knee-jerk after the earlier FOMC statement, MBS just hit their lowest marks of the day at 102-10 in FNCL 4.5's. They've already ticked back up to 102-11, and as of now, there's no way to tell how this Q&A session will ultimately be traded, but any time MBS hit lows of the day, it constitutes a moderate increase in reprice risk. A caveat to that generality is that today's trading has been mostly contained in a mere 4 tick range. While reprices for the worse are probably not likely right now, we wanted you to be aware that prices had moved closer to riskier levels, and trading is active. We'll send another alert if we break 102-10.

As markets gear up for the 2:15pm press conference, MBS and TSYs have improved just slightly. But Treasuries whereas MBS haven't had a sustained downtrend today, TSYs mostly worsened heading into the FOMC Announcement. That leaves MBS as the noticeable outperformer today. Current coupon spreads to the 10yr have tightened 3bps, almost exactly matching the amount by which they widened yesterday. FNCL 4.5's are down only 3 ticks at 102-14. 10yr notes are up just over 4bps at 3.3496. If MBS make it to 102-16, reprices for the better become a possibility, increasing in likelihood the longer or more stably that's achieved.

(Reuters) - The Federal Reserve signaled on Wednesday it is in no rush to scale back its extensive support for the U.S. economy and said a run-up in commodity prices that has dented growth should be fleeting. The Fed's policy-setting Federal Open Market Committee said in a statement after a two-day meeting it intends to complete its $600 billion bond buying program in June as scheduled. In the face of headwinds from high oil prices, the U.S. central bank said the economic recovery was proceeding at a "moderate pace" -- dialing back slightly from a statement in March when it said the economy was on "firmer footing." It again expressed confidence a surge in the cost of oil and other commodities would be transitory and not spark a broader inflation. "Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," it said. There were few surprises in the Fed's statement and financial markets largely took it in stride. Stocks inched higher, the dollar held roughly steady and bonds cut losses. "We did not expect any material surprises in the FOMC statement and there was none," said Bret Barker, portfolio manager at TCW in Los Angeles. "It remains quite dovish." Nevertheless, the statement marked a near-conclusion -- at least for now -- of the massive expansion of the Fed's balance sheet that helped pull the economy out of its deep recession. The central bank said it would continue to reinvest proceeds from maturing securities it holds to keep its economic support in place. The big question for investors, however, is what comes next. Markets will look for clues in a question and answer session Fed Chairman Ben Bernanke will hold with journalists at 2:15 p.m. The briefing marks the first regularly scheduled news conference by a Fed chairman in the central bank's 97-year history.

The Fed continues to note the "moderate pace" and "gradual improvement" of the economic recovery. While long term inflation continues to be seen as stable and underlying inflation "subdued," there was specific mention of inflation picking up in recent months. The Fed says it will continue to monitor inflation but for now sees even the underlying inflation metrics as "somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate." The $600 billion of long term Treasury buying will continue and complete as scheduled, though the committee will continue to review those holdings and make adjustments based on new information "as needed." The statement specifically notes that it's "maintaining its existing policy of reinvesting principal payments from its securities holdings." This is an important consideration in determining what the Fed's role might be in acting as a buyer in the Treasury market. So we're essentially left with no change to previous verbiage, plus a slight acknowledgment of oil prices exerting pressure on short term inflation. Markets may show signs of fear surrounding that type of inflation at times, but the Fed is essentially saying "we don't see that as an issue but we'll let you know when/if that changes, and we'd do something about it if that happens." Bottom line: no surprises and open to interpretation. In light of the absence of groundbreaking comments, the press-conference later today and even the remaining economic data this week have NOT been rendered inconsequential by the Announcement and will have plenty of opportunities to move markets in the coming hours and days.

Both in the overnight session and in the last half hour before the auction, Treasury yields moved higher. This type of "concession" is a normal way that markets get in position for TSY auctions and not an alarming indication of broader momentum. The selling took 10 yr yields as high as 3.37, but the initial reaction to the auction brings yields right back to their previous range this morning between 3.355 and 3.345. FNCL 4.5's briefly touched their best mark of the day at 102-13, but are a tick off that now at 102-12. That's 5 ticks worse on the day and very much in line, albeit on the higher side, of the morning trading range. Both MBS and TSYs are effectively saying "bring on the Fed" as the 1230pm FOMC announcement and 215pm Press Conference continue to be the best candidates for market movers today.

* U.S. SELLS $35 BLN 5-YEAR NOTES AT HIGH YIELD 2.124 PCT, AWARDS 22.11 PCT OF BIDS AT HIGH * U.S. 5-YEAR NOTES BID-TO-COVER RATIO 2.77, NON-COMP BIDS $101.77 MLN * US TREASURY - PRIMARY DEALERS TAKE $17.04 BLN OF 5-YEAR NOTES SALE, INDIRECT $13.96 BLN

Even though "rate sheet influential" MBS prices are down 6/32, C30 loan pricing is basically unchanged today. This makes sense as most lenders were hesitant to reprice for the better yesterday, so there was some cushion in loan pricing to absorb weakness in the secondary market. That said, if FNCL 4.5 prices drop another 4-5 ticks from current levels...reprices for the worse will be likely. On the other hand, if FNCL 4.5 prices recover current intraday losses...rate sheets will be due about 0.125 in rebate.

Treasury is set to sell $35-billion 5yr notes. TAAPS cuts-off bids at 11:30am today instead of the normal 1pm deadline. This change was implemented to give traders an opportunity to prepare for the new FOMC meeting schedule where the Statement is released at 12:30 followed a press conference at 2:15pm (only 4x a year). In regard to the auction itself, here is some history. The bid to cover ratio is averaging 2.74 in the last five auctions. Dealers have had to increase their takedowns lately as bidside interest has generally declined. Dealers are adding near 52% of the competitive bid in the last five auctions. Direct bidders are averaging a 10% award while indirects have been awarded 38% of the issue on average. In terms of yields, 5s have "tailed" in five of the last six auctions. Tailed means the auction high-yield came in above the "When Issued" yield. This implies bidders were only willing to purchase supply at cheaper prices/higher yields. The "When Issued" yield is currently 2.116% vs. the OTR yield of 2.074%. Benchmark 5-yr yields have backed-up 6.1bps this AM. This is a decent size pre-auction concession and should provide incentive to "wave in" new inventory.