After a relatively healthy week of economic data and Fed Speakers, tomorrow's monthly options expiration day contains no scheduled economic reports. The fine people of Fishkill, NY will be greeted by the Fed's Dudley, speaking on the economic outlook to the Dutchess Country Chamber of Commerce. And that's really the only thing that is happening tomorrow, unless you count a little weekly index that we almost never mention, the ECRI (Economic Cycle Research Institute). It turns out that business cycles are a bit less relevant during times of unprecedented financial crisis and recovery. As is sometimes the case, options expirations days, volatility is possible, especially if liquidity is low. After the weekend, however, it's another busy week with Data and Fed speak, as well as TSY auctions to look forward to.

Most of the MBS stack and the yield curve are now positive on the day with FNCL 4.5's up 2 ticks at 103-09 and 10yr notes just over 1bp lower at 3.1727. Early afternoon stability gave way to further gains which leveled off at current prices and yields. This increases the likelihood of reprices for the better from lenders that haven't released one yet.

* FED'S EVANS-US FINANCIAL CONDITIONS ARE GREATLY IMPROVED * BANKS WILLING TO LEND TO BIG COMPANIES, BUT LENDING TO SMALLER BUSINESSES CHALLENGING * WE ALL HAVE AN EYE ON POTENTIAL FOR ASSET-PRICE 'EXUBERANCE' BUT I TEND TO THINK MARKETS ARE WORKING WELL * MINDFUL THAT DECLINES IN DOLLAR COULD GIVE RISE TO HIGHER INFLATIONARY PRESSURES *FED'S MONETARY ACTIONS, QE1 AND QE2, HAVE HELPED ECONOMY *REDUCING BALANCE SHEET TO A MORE NORMAL SIZE WILL TAKE RELATIVELY LONGER PERIOD OF TIME * WE HAVE THE TOOLS TO TIGHTEN POLICY WHEN NEEDED, EVEN WITH A LARGE BALANCE SHEET

* FED'S FISHER: WE HAVE GONE FROM TOO LITTLE LIQUIDITY TO TOO MUCH *LATEST ROUND OF FED BOND BUYING WAS "A BIT TOO MUCH" * U.S. MUST ASSURE THE WORLD THAT IT IS SOLVENT OVER THE LONG TERM, MUST MAKE FISCAL ADJUSTMENTS *MUST MAKE SURE WE DON'T HURT DOMESTIC VALUE OF DOLLAR THROUGH INFLATION * GASOLINE PRICES HAVE ALREADY HAD A RETARDING EFFECT ON U.S. ECONOMIC GROWTH * ECONOMY IS GATHERING STEAM, THOUGH NOT EXACTLY "ROBUST" Today * RECENT DATA, INCLUDING THIS MORNING'S, MIGHT GIVE US A LITTLE PAUSE OVER STRENGTH OF RECOVERY

* FED’S Evans says u.s. economy now on firmer footing after deep, lengthy recession * Evans - reasons for optimism include improving jobs picture, strong manufacturing * Evans - weaknesses remain; higher energy prices sapping household, business purchasing power * Evans - expected u.s. gdp growth of 3.75 pct too slow to generate swift relief in labor market * Evans-accommodative policy continues to be warranted to address FED’S maximum employment mandate * Evans-oil price rise driven by global increase in demand and by supply constraints * Evans-it is a mistake that sudden price rise for a single product, like gas, has broader inflationary relevance * Evans - rising commodity prices will have limited impact on inflation * Evans-resource slack will exert important downward influence on inflation pressures * Evans sees food, fuel prices pushing up pce inflation to 2 pct to 2.5 pct this year, then fall * Evans - to change own inflation outlook, would need to see stronger gdp, wage growth * Evans-if inflation expectations started to creep up, fed would act to keep them well-grounded * Evans - we will adjust policy if changes in inflation become incompatible with FED’S mandate * Evans says substantial policy accommodation continues to be appropriate * Evans-despite recent improvements, not yet at point where change in monetary policy stance needed * Evans-must continue to evaluate new data and reassess monetary policy as circumstances warrant

There are several conditions under which lenders may reprice for the better or the worse and these depend on several factors. Some of the conditions can be logically inferred, such as the overall gains or losses on the day reaching a certain magnitude. But another common scenario in which reprices for the better are seen is when a stable afternoon follows a volatile morning, especially when the afternoon period of stability is higher in price than the volatility in the morning. Given that quite a few lenders released initial rates during a volatile time of the morning today (anything before 10am basically) and that prices were 2-4 ticks lower than they are now, the mere fact that FNCL 4.5's have continued to hold onto 103-05 so steadily is sufficient peace of mind for a few lenders to begin offering a few extra bps. It's not widespread yet, nor will it be unless we improve a bit in price, but several lenders have reported reprices for the better so far. 10yr TSYs are at 3.199 currently fighting off stocks that have rallied back into the green (although the S&P Index is stalling out a bit before reaching it's earlier morning highs).

Next week's auction cycles will include $35 bln in 2 yr notes, $35 bln in 5 yr notes and $29 bln in 7 yr notes. These amounts are unchanged from the previous auction. Treasury estimates $49.17 bln of coupon securities held by the public will be maturing on May 31st. That means Treasury must raise $49.17bn in cash to return principle. (Subtract that from the auction amounts and you get the $amount of new cash raised by TSY. just under $21 bln dollars).

S&P index recently ticked back into positive territory and the stock lever is exerting a moderate pressure on TSYs and to a lesser extent, MBS. 10 yr notes made it into the 3.18's and find themselves now back at 3.2041. The losses are less directional for MBS with FNCL 4.5's only a tick or two off recent highs bringing the day over day change to 2 ticks negative at 103-06. This decreases the likelihood of reprices for the better, making a very small number of them a very small possibility. Still no risks of reprices for the worse however.

MBS are up 6 ticks from their lows, down only a tick on the day at 103-07. Lenders releasing rates between 9 and 10am may consider repricing for the better at current levels, especially if they hold steady or improve further. 10yr yields just dipped under 3.20 for the first time today. Note, this is an EARLY alert on possible reprices. We'd have to avoid turning around if we're to see any. We'd need further gains for widespread reprices.