"Rate sheet influential" MBS coupons are following Treasury prices higher as traders cover short positions before the long weekend ahead. This bullish behavior has led benchmark 10s through strong resistance at 3.09% and carried FNCL 4.0s to new 2011 price highs (100-20). Reprices for the better are possible. The earlier your lender published rate sheets, the more likely you are to see recalls. On a defensive note, we remain wary of profit taking at these levels but it is encouraging to see the rally hold in high-volume even as stocks have attempted a bounce from intraday lows. (Thank you short covering!)

Nearly a million 10yr futures contracts have traded so far today, putting it on pace with the busiest days of the year. Stock markets struggled to break even earlier this morning but recently fell to support at yesterday's opening levels. In terms of the S&P the index moved from 1320 to 1315 but has since bounced to 1317. 10yr yields gently nudged what now looks like an expanding range of yields, hitting their lowest mark of the week at 3.085. Currently, they remain below the 3.095 resistance but further facilitation of the rally could be hampered by the looming 7yr auction about 3 hours from now. MBS are lagging TSY gains. FNCL 4.5's are up 4 ticks to 103-20. Lenders who released rates early this morning may consider repricing for the better if current gains hold.

RealtyTrac today released its Q1 2011 U.S. Foreclosure Sales Report™, which shows that sales of bank-owned homes and those in some stage of foreclosure accounted for 28 percent of all U.S. residential sales in the first quarter of 2011, up slightly from 27 percent of all sales in the fourth quarter of 2010 and the highest percentage of sales since the first quarter of 2010, when 29 percent of all sales were foreclosure sales. The average sales price of properties in some stage of foreclosure — default, scheduled for auction or bank-owned (REO) — was $168,321, down 1.89 percent from the fourth quarter of 2010 and down 1.46 percent from the first quarter of 2010. The average sales price of properties in some stage of foreclosure — default, scheduled for auction or bank-owned (REO) — was $168,321, down 1.89 percent from the fourth quarter of 2010 and down 1.46 percent from the first quarter of 2010. The average sales price of foreclosure properties was nearly 27 percent below the average sales price of properties not in foreclosure, unchanged from the 27 percent foreclosure discount in the fourth quarter and up slightly from the 26 percent foreclosure discount in the first quarter of 2010. Third parties purchased a total of 158,434 U.S. bank-owned homes and those in some stage of foreclosure during the first quarter, a decrease of 16 percent from a revised fourth quarter total and down 36 percent from a revised Q1 2010 total. Bank-owned properties that sold in the first quarter had been repossessed by the bank an average of 176 days prior to the sale, while properties that sold in the earlier stages of foreclosure in the first quarter were in foreclosure an average of 228 days before selling.

All three economic reports painted a weaker and more stagnant economic picture. But at least so far, markets have only shown a "safe" reaction in the sense that both TSYs and stocks are moving within the week's ranges. FNCL 4.5 MBS are up 3 ticks on the day now, in line with their highs of the week at 103-19. 10yr notes had risen exactly to weekly highs at 3.155, a pivot point we mentioned yesterday as the dividing line between this week and last. After the data, yields fell to test 3.11, exactly the same technical resistance seen following yesterday's auction. 3.095 is the low of the week and provides a slightly more aggressive resistance candidate. Even so, the fact that the initial movements fall within the range already seen this week suggests that markets are either uninspired by the data or simply waiting for the remaining shoes to drop in the form of the 7yr auction later today and tomorrow morning's economic data.

GDP was unrevised at annual rate of 1.8 percent, below economists' expectations for a 2.1 percent pace. Indications are that the sluggish growth tone persisted early in the second quarter, with retail sales lackluster and supply chain disruptions from the earthquake in Japan depressing motor vehicle production. The economy expanded at a 3.1 percent rate in the fourth quarter. Though overall GDP was unrevised, the report showed a bigger increase in restocking by businesses and slightly higher capital outlays, which helped to offset downward revisions to consumer spending. But a decline in vehicle production so far in this quarter because of shortages of parts from Japan could cause a drawdown in inventories and weigh on growth in the April-June period. Motor vehicle output added 1.28 percentage points to first-quarter GDP. Consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- expanded at a much slower 2.2 percent rate in the first three months of this year instead of 2.7 percent. After rising at a 4 percent clip in the fourth quarter, spending was dampened by high food and gasoline prices, which sent inflation rising at its fastest pace in 2-1/2 years. The personal consumption expenditures index rose at an unrevised 3.8 percent rate in the first quarter. That compared to the fourth quarter's 1.7 percent increase. The core PCE index closely watched by the Fed advanced at a 1.4 percent rate rather than 1.5 percent. Fed officials would like to see this measure close to 2 percent. While exports were much stronger than previously estimated, imports also accelerated, resulting in trade having a muted impact on growth. Government spending contracted at a 5.1 percent rate rather than 5.2, with defense outlays dropping at an unrevised 11.7 percent rate. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)

WASHINGTON, May 26 (Reuters) - Corporate profits in the U.S. unexpectedly contracted in the first quarter to record their first decline in more than two years and the economy grew at the same pedestrian pace as previously estimated, a government report showed on Thursday. After-tax corporate profits fell at a rate of 0.9 percent, the Commerce Department said, after rising at a 3.3 percent rate in the fourth quarter. The drop in profits, the first since the fourth quarter of 2008, likely reflected a slowdown in productivity growth as businesses stepped up hiring. Economists had expected corporate profits to grow at a 2.3 percent pace. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)

Jobless claims rose from a revised 414k to 424k, higher than the expectation of 400k. The four week moving average continued to fall, but only slightly--reaching 438.5k versus 440k last week. Continued claims also edged down fractionally, moving from 3.7 mln last week to 3.69 mil in the current report.