With no more scheduled economic data for the day, the stock market is one of the places we look to build a picture of what's moving bond markets, especially with earnings data, etc... There are two ways the stock lever can express connection: merely with "positive correlation," where stock prices tend to rise and fall as bond prices rise or fall, or with PROPORTIONAL positive correlation where the same amount of up or down movement on one side of the market CONTINUES to coincide with a similar level of movement on the other side. For instance, if stocks moved down 10 pts and bond yields dropped 5 bps, followed by stocks moving up 10 pts and bond yields moving up 5 bps, that would be a PROPORTIONAL move. If, on that second phase, bond yields only moved up 2-3 bps, that would merely be "positively correlated." This is more like the stock lever we've seen of late. While there are more instances of stocks and bonds moving in the same direction as opposed to diverging, those moves are out of proportion with each other from minute to minute (and beyond). To wit, S&P futures were around 1310 at 8am and 10yr yields near 2.96. Since then, EVEN THOUGH both markets are mostly moving up and down together at the same time, stock prices are higher and bond yields lower--aka proportion issue, and one that is in our favor. If things were proportional, S&P futures currently at 1314 would suggest a range break above 2.95 for 10yr notes. The fact that 10's are currently at 2.942 and have generally looked supported at 2.95 is a very strong suggestion that we look at one of the other market mover "usual suspects:" TECHNICALS. So far, 2.95 has been our friend, but there's an unfriendly trend channel leading higher in yield from yesterday that has yet to be broken. Until that breaks, we're a bit more defensive than we otherwise might be. That support level coincides with Fannie 4.0 prices near 100-12. They're currently at 100-15.

(Reuters) America’s leading mortgage lenders vowed in March to end the dubious foreclosure practices that caused a bruising scandal last year. But a Reuters investigation finds that many are still taking the same shortcuts they promised to shun, from sketchy paperwork to the use of “robo-signers.” (by Scot j. Paltrow)

This measure will probably pass the House but it won't get through the Democrat controlled Senate. Playing these political games sends a message to the bond market that says "we won't get serious until you push rates higher". We hope it doens't come to that....... (CSPAN) - The House of Representatives will debate and vote on the Republican proposal to raise the debt ceiling. The measure, called the "Cut, Cap and Balance Act," would raise the debt limit by $2.4 trillion but would be accompanied by mandatory spending cuts and a balanced budget amendment. The measure, authored by Representative Jason Chaffetz (R-UT), would require up to $2 trillion of cuts to discretionary spending over the next ten years. It would also cap spending at under 20% of gross domestic product in a decade (spending is currently more than 23% GDP). The White House put out a statement saying it "strongly opposes" the Republican measure and said the President would veto it. "Neither setting arbitrary spending levels nor amending the Constitution is necessary to restore fiscal responsibility," a statement by the Office of Management and Budget read. Realizing that the House bill is unlikely to pass the Senate, Senate leadership is drafting what is considered a “fall-back” or “last-ditch” option, which could become the leading option in coming days as the August 2nd deadline to lift the debt ceiling nears and negotiations with the President to reach a “grand bargain” are elusive. Majority Leader Harry Reid (D-NV) and his Republican counterpart, Senator Mitch McConnell (KY), continue work on a complicated multi-step plan initiated by Sen. McConnell that allow the President to raise the debt ceiling without the Republicans having to vote in favor of it. McConnell’s plan would enable the President to lift the debt ceiling by up to $900 billion three times through 2012, but he must propose spending cuts of the same amount. Those cuts do not need to be enacted, though

There's a diverse a la carte menu of overnight events to choose from in deciding who to blame for weaker domestic bond markets this morning. Sadly, no single event stands out as having done a majority of the heavy lifting. 10yr yields have been rising since 2am, in moderately steep fashion, and with ebbs and flows of volume not associated with "tape-bomb" type news. A few of the likely suspects include an ECB's Nowotny backing up Trichet's soft-talk on Greece yesterday, adding that a solution could include a "selective default" in the hopes of "avoiding any option that would make it impossible for the ECB to continue to accept Greek sovereign bonds as collateral." But this tidbit belies the more likely reality. Noting the absence of vertical spikes in overnight charts, taken in conjunction with the upcoming meetings in the EU on Wed and Thu, the technical resistance levels reached in US Treasuries, and hopes for upbeat domestic earnings, it simply seems that we're dealing with more of the "risk-on" trade we noted yesterday as having been unkind to MBS spreads. But just as technical levels are a potential factor in weakness, so too can they be supportive. After hitting 2.95 around 4am, 10yr yields have since ground around sideways between there and 2.96 and have recently moved just under 2.94 as the domestic session gets underway, all but scoffing at a better-than-expected Housing Starts number. Fannie Mae 4.0 MBS are down 5 ticks (5/32nds) on the day at 100-15. Taking this into account in addition to the declining slope to yesterday's MBS trade, expect rate sheets to be worse.

(Bloomberg) - Bank of America Corp. (BAC) posted the biggest quarterly loss in the lender’s history after Chief Executive Officer Brian T. Moynihan booked more costs tied to defective mortgages. The second-quarter loss of $8.83 billion, or 90 cents a share, compared with profit of $3.12 billion, or 27 cents, a year earlier. Provisions for future credit losses dropped 60 percent, the bank said, and profit excluding one-time gains and losses was 33 cents a share, beating the 29-cent average estimate of 21 analysts surveyed by Bloomberg. Moynihan, 51, is working to move Bank of America past the fallout from lax home lending by reaching settlements with bond investors and insurers and setting aside funds for future claims. The loss was smaller than the most pessimistic forecast given last month by the company, which estimated the deficit could range from $8.6 billion to $9.1 billion. Bank of America told investors June 29 it would book more than $20 billion in second-quarter charges from faulty mortgages. The sum includes $8.5 billion to resolve claims from institutional investors that the Countrywide unit used false or missing information to create home loans that later defaulted. Regulators criticized Countrywide’s lax underwriting, which left the firm near bankruptcy before Bank of America bought it for $2.5 billion in July 2008. The settlement followed a $3 billion accord in January to resolve similar claims from Fannie Mae and Freddie Mac, and an April agreement with bond insurer Assured Guaranty Ltd. (AGO) valued at $1.6 billion. If home prices decline beyond internal company estimates, the bank may need to set aside more capital for soured mortgages, executives have said.

(Reuters) - U.S. housing starts rose more than expected in June to touch a six-month high and permits for future construction unexpectedly increased, a government report showed on Tuesday, likely reflecting growing demand for rental apartments. The Commerce Department said housing starts increased 14.6 percent to a seasonally adjusted annual rate of 629,000 units, the highest level since January. But May's starts were revised down to a 549,000 unit pace, which was previously reported as a 560,000 unit rate. Economists polled by Reuters had forecast housing starts rising to a 575,000-unit rate. Compared to June last year, residential construction was up 16.7 percent. Despite June increase, housing starts are less than a third of their peak during the housing boom. An overhang of previously owned homes on the market has left builders with little appetite to break ground on new projects and is frustrating the housing sector's recovery two years after the end of the 2007-09 recession. But demand for rentals, as Americans shun homeownership because of plummeting home prices, is stemming further declines in the housing market. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)