Nearly all of yesterday's gains have been recaptured in terms of Fannie Mae 4.0 MBS. One of the big boys even repriced for the better, but given the weak levels of the initial rate sheets, it's not really a profound commentary on the health of the bond market this morning. Hence the quotation marks around the word "roaring." It's not so much that bonds are seeing some major correction vs yesterday, destined to restart the positive momentum lost last week. Rather, we have a bond market that's currently in the process of determining whether or not it will continue to trend sideways or get weaker. Yesterday was about as weak as it could get without actually confirming that broader negative shift. Bottom line: this morning's resilience prolongs a sideways trend, one that is dangerously close to being bearish. Fannie Mae 4.0's are up 6 ticks on the day at 100-11, and the increasingly relevant Fannie 4.5's are up 4 ticks at 103-21. 10yr Treasuries also clearly support the notion of "moderating vs yesterday" as opposed to completely erasing the losses. Reason being: 10yr yields fell this morning to the same levels seen AFTER yesterday morning's data. 10's are clearly reluctant to dig into that range spanning the 2.98 to 3.055 seen in the 15 minutes following the 830am data yesterday. Again... at current yields near 3.07, this morning is (so far) just a minor adjustment to yesterday's negativity. The reprice for the better is somewhat anomalous, and again, probably more a factor of the initial weakness this morning. More gains would be needed before anticipating more widespread reprices.

(Reuters) - U.S. homebuilder sentiment unexpectedly declined in June to its lowest level since September 2010 as the market continued to struggle, the National Association of Home Builders said on Wednesday. The NAHB/Wells Fargo Housing Market index fell to 13 in June from 16 in May whereas a Reuters poll of economists had expected the gauge to hold at 16. The index had come in at 16 in six of the past seven months as of May. Readings below 50 mean more builders view market conditions as poor than favorable. The index has not been above 50 since April 2006. Persistent weakness in existing home prices and rising materials costs have hit homebuilders, NAHB said. "Builder confidence has waned even further as economic growth has stalled, foreclosures have continued to hit the market and the cost of building a home has risen," said NAHB chief economist David Crowe in a statement. "Economic growth must pick up in order for housing to gain the momentum it needs to get back on track," he added. (Reporting by Leah Schnurr; Editing by James Dalgleish)

Industrial out put in May rose 0.1 pct overall vs an unchanged reading in April, although economists' forecasts called for a 0.2 pct increase. Capacity utilization was unchanged from last month's 76.7 pct, fairly close to the forecast of 77.0 pct. Improvements in the Business Equipment and Construction Supplies components of the report drove the positive figure coming in at +1.2 and +1.4 respectively versus -0.3 and +0.1 respectively in the previous month. Despite the Motor Vehicle Assembly Rate rising to 7.88 mln units per year from 7.86 units/yr last month, The Fed still noted that output was hampered over the past two months by the Japan-related supply chain disruptions.

It looks like rate sheets will recover a portion of yesterday's losses as stocks shed gains and interest rates rally this morning. The Fannie Mae 4.0 MBS coupon is currently +7/32 at 100-12. Stock futures are down nearly 1.00% and benchmark 10yr note yields are 3.5bps lower at 3.07%. If lenders took down indications right now we'd anticipate rate sheets to improve by 10 to 20bps. Loan pricing appreciations come as somewhat of a surprise after the bond market was forced to absorb a warmer than expected read on consumer level inflation at 830am. While inflationary pressures generally lead to weakness in bonds, this data has been offset by a poor regional manufacturing survey and continued concerns surrounding the Eurodebt crisis. With the S&P teetering on a broader collapse, we are witnessing a tug-of-war in big picture trading technicals at the moment. Look for stocks to provide directional guidance to interest rates today.

(Reuters) - Foreigners increased purchases of long-dated U.S. securities in April for the first time in five months, the U.S. Treasury said on Wednesday, while China raised its holdings of U.S. government debt. The United States attracted a net long-term capital inflow of $30.6 billion in April, an increase from $24 billion the prior month. Including short-dated assets such as Treasury bills, foreigners bought a net of $68.2 billion. That was down from an upwardly revised $127.1 billion inflow in March. Net overseas buying of U.S. Treasury debt fell by $3.4 billion to $23.3 billion, a fifth consecutive monthly decline. But net foreign purchases of U.S. equities rose. China, the largest foreign U.S. creditor, increased its overall Treasury holdings by $7.6 billion to $1.153 trillion. (Reporting by Steven C. Johnson; Editing by Chizu Nomiyama)

Today BuildFax unveiled its BuildFax Remodeling Index (BFRI) and it shows that consumers are continuing to invest in remodeling, even while the economy continues to struggle and the real-estate market continues to experience sales decreases coast to coast. The April 2011 index rose 15% year-over-year—and for the eighteenth straight month—in April to 109.7, the highest April number in the index to date. In addition, the Index reveals that there were 10 percent more remodels in April 2011 compared to April 2004, the first month tracked by the Index. All regions posted month-over-month gains, and only the Midwest posted a year-over-year loss. The West was up 16.8 points (18%) year-over-year and up 5.3 points (5%) month-over-month. The Midwest was down 16.9 points (19%) year-over-year and up 10.7 points (17%) month-over-month, recovering slightly from a lower-than-average March. The Northeast was up 3.2 points (5%) year-over-year and 9.1 points (14%) month-over-month, and the South was up 9.6 points (11%) year-over-year and 10 points (12%) month-over-month. “April traditionally sets a baseline for the rest of the year in residential remodeling activity, and April 2011 is the best we’ve seen since the beginning of the index in April 2004,” said Joe Emison, Vice President of Research and Development at BuildFax. “The BFRI is indexed to start at 100 in April 2004 and here we are seven years later, after significant drops in housing value, and the index is almost 110. That means there were almost 10 percent more residential remodels in April 2011 than in April 2004. Given the relatively pessimistic economic news that we heard about April, including a slowing recovery, this is a nice surprise for the industry.”

(Reuters) - U.S. core consumer inflation rose more than expected in May to post its largest increase in nearly three years years, lifted by steep rises in motor vehicle and apparel prices. The Labor Department said on Wednesday its Consumer Price Index, excluding food and energy, increased 0.3 percent, the largest gain since July 2008, after rising 0.2 in April. Economists had expected core CPI to rise 0.2 percent last month. Overall CPI increased 0.2 percent, slowing from a 0.4 percent advance in April, as gasoline prices fell. Economists had expected CPI to rise 0.1 percent last month. But in the 12 months to May, consumer prices rose 3.6 percent, the biggest jump since October 2008, and well above expectations for a 3.4 percent increase. The year-over-year core inflation index rose 1.5 percent in May from 1.3 percent in April. (Reporting by Lucia Mutikani; Editing by Padraic Cassidy)

(Reuters) - A gauge of manufacturing in New York State showed the sector unexpectedly contracted in June, falling below zero for the first time since November 2010 in another sign the economic slowdown could become more protracted, the New York Federal Reserve said in a report on Wednesday. The New York Fed's "Empire State" general business conditions index fell to minus 7.79 from positive 11.88 the month before. Economists polled by Reuters had expected a gain to 12.50. The new orders and shipments indexes also deteriorated. New orders tumbled to minus 3.61 from 17.19, while shipments dropped to minus 8.02 from 25.75. New orders were also at their lowest since November 2010. The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. Employment gauges also worsened, with the index for the number of employees falling to 10.20 from 24.73 and the average employee workweek index weakening to minus 2.04 from 23.66. The index of business conditions six months ahead declined to 22.45 from 52.69, falling to its lowest level since March 2009.

Bonds got crushed yesterday as equities took desperate measures to avoid an all out collapse. The 10yr note yield rose almost 12 basis points to 3.101% and production MBS coupon prices dropped 21/32 in price, forcing lenders to reprice for the worse on multiple occasions. Benchmark Treasuries traded mostly sideways to slightly better in the overnight session as stocks came off yesterday's highs after Eurozone finance ministers came to another impasse on the (n)ever-evolving debt crisis in Greece. (Reuters) - Edgy investors ditched lower-rated euro zone government debt on Wednesday, sending Greek bond yields soaring to new highs after officials showed little sign of progress on a new deal to tackle Greece's crisis. Differences of opinion between policymakers on how to involve private holders of Greece's debt in a new bailout package have heightened uncertainty in financial markets, pushing Greek, Irish and Portuguese bond yields to euro-lifetime highs. "Hopes get dashed more and more that we won't get a waterproof solution by the end of next week," said Commerzbank rate strategist David Schnautz. "This is placing another big layer of uncertainty over everything and it sounds like you don't want to be that much invested in the periphery at the moment." Trading volume was above-average but not huge into the marginal recovery bounce in bonds. The 10yr note is currently +7/32 at 100/13 yielding 3.077%. The 2s/10s yield curve is 1bp flatter at 265bps wide. And the Fannie Mae 4.0 MBS coupon is +4/32 at 100-09. S&P futures are -8.00 (-0.62%) at 1282. Dow futures are -41 (-0.34%) at 12,033.