S&P's are nearly back to their 1322.16 highs seen earlier in the day. The movement in equities and bond markets has become more connected after the initial post-auction movements and 10yr note yields are on the rise. Both 10's and MBS are at their weakest levels since the suction but remain mid-range on the day with the former at 3.129 and the latter at 103-17 in FNCL 4.5's. If stocks are able to break through their highs of the day and extend a bit, MBS could once again fall enough to begin entertaining possible reprices for the worse.

* FED’S Kocherlakota repeats call for modest interest-rate hike by year's end * Kocherlakota sees U.S. gdp growing 3 pct in 2011 * Kocherlakota - unemployment rate likely to be above 8 pct, close to 8.5 pct by end of year * Kocherlakota says expects core pce inflation to rise to 1.5 pct by year's end * Kocherlakota - if inflation rises as expected, FOMC should raise target rate by half percentage point * Kocherlakota - if core PCE inflation rises to 1.8 pct, FED should raise rates more aggressively * Kocherlakota - if 2011 inflation falls, desirable for FED to make further asset purchases

Treasury just auctioned $35 billion 5-yr notes. Demand metrics were strong on all fronts. More than 98 percent of the issue was sold above the lowest price tendered (good for taxpayers). The bid-to-cover ratio came in at 3.20 bids submitted for every one accepted, which is well-above recent averages. And the high-yield (1.813%) was 1.6bps below the 1pm "When Issued" bidder yield. In terms of the buyer breakdown, indirect accounts were the clear cut MVP with a well above-average 47.1% award. Dealers and Directs were non-factors with subpar awards and hit rates. In all actuality, the buyer breakdown is sorta ho-hum besides the massive influx of indirect bidder demand ($24bn tendered = huge). Dealers did tender a larger $$$ amount than usual, which makes sense given their large short position in the 5-yr note, but someone else outbid them, as illustrated by the bidding metrics above and the indirect award. Hedge Funds covering short positions or Central Bankers putting cash to work? Likely both. Plain and Simple: This was a strong auction because indirect bidders made it strong. Dealers behaved like very willing buyers based on their upsized tender size($74bn vs. $66bn previous), but they weren't willing to pay the more expensive price tag like indirects. This leaves the street in an awkward position... praying for higher rates to allow for cheaper short covering down the road. Smells like a short-squeeze is brewing (either that or a massive selloff-doubtful). Rates are rallying on more short covering in the aftermath, but resistance isn't far ahead. Reprices for the better are not yet on our radar, we will alert if they become a possibility.

As the 5yr TSY Note Auction approaches, FNCL 4.5 MBS are down a total of 2 ticks on the day at 103-15+. This puts them on a plateau of prices that began after yesterday's auction, having not dipped into the 103-14's except for one brief period of time this morning. 10yr notes are on a similar sort of short term pivot, and would like to hold 3.155 on post auction weakness. If that breaks the swings could get bigger. Otherwise, the current short term range limits are roughly 3.09 and 3.16. Reprices for the worse remain a possibility with MBS at their lows, and become more likely if the post-auction trading sees additional losses.

Shortly after rates hit their best levels of the day around 10:20am, which prompted us to issue a positive reprice alert, profit takers rang the register and pressured both MBS and TSY prices lower. Traders were motivated to book P&L gains as benchmark TSYs closed in on technical resistance at 3.09% and stocks pushed into positive territory. C30 loan pricing is 18.1bps better on average among the five major lenders today. These rebate improvements reflect MBS price gains that were not passed along by four of the 5 major lenders yesterday afternoon. If you received reprices for the better yesterday and loan pricing improved further today, you are at risk of losing those additional bps today, especially if MBS prices fall further (target 103-14 on FNCL 4.5s). If you did not receive reprices for the better yesterday afternoon and loan pricing improved today, you have a bit more cushion to work with, we'd target 103-10 on FNCL 4.5s.