In a word, yes... Tomorrow is too soon to begin resolving recent volatility. But that's not to say that markets won't try to make a convincing "lead-off" in one direction or another. Any more bond-market-bullishness and the lead off would clearly be back to test something near a 2.85/2.87% 10yr yield. But certainly an unfriendly move could easily test the other side of the technical picture at 3.03. While the longer term possibilities depend on the unknowns surround the debt-ceiling, economic data can certainly have an impact tomorrow. There's GDP and the Employment Cost Index at 8:30am. Then Chicago PMI at 945am and Consumer Sentiment at 955am. That's it for econ data tomorrow. You might want to plan on volatility and movement even after that though, as there will likely be more than a few headlines popping up on this Friday before the Tuesday of 8/2.

(Reuters) - The Federal Reserve plans to provide guidance to banks soon on how to handle the potentially turbulent financial waters if the United States exhausts its borrowing authority. "We have been engaged in operational planning with the Treasury," Fed spokeswoman Barbara Hagenbaugh said on Thursday. "We expect to be able to give additional guidance to financial institutions when there is greater clarity from the Congress and when Treasury outlines its specific operational plans." (Full Story):

Reuters) - The Federal Reserve could begin requiring greater amounts of Treasury securities as collateral for emergency loans to banks in case of a U.S. debt downgrade or outright default, a top Fed official said on Thursday. Jeffrey Lacker, president of the Richmond Fed, said he hopes Congress will come to a deal to raise the debt ceiling soon. But he added that if no action is taken and the situation worsens, the Fed might need to reevaluate the way it discounts Treasury securities used by banks to back up emergency lines of credit. "We might need to reevaluate discount window haircuts on Treasury securities if it was warranted," Lacker said in response to questions from reporters. (Reporting by Pedro Nicolaci da Costa; Editing by Andrea Ricci)

Bond Markets' reaction to the 7yr note auction continues to be uncommonly subdued (especially for MBS). Fannie 4.0's are currently up 12 ticks on the day at 100-22, just 1/32nd off from auction time. 10yr notes hovered in the 2.95's around 1pm and are currently at 2.958. There's been a supportive ceiling in play at 2.965 which has kept the lid on several moves higher in yield today. Although MBS Prices are not making any new highs at the moment, just the stability of the already-achieved highs makes reprices for the better an ongoing possibility, but it's still not likely to motivate a majority of lenders.

Default would be political suicide for all parties involved, making it a highly unlikely event. But if we were to default on a coupon payment, there would be a huge margin call followed by deleveraging and a major repricing across the credit spectrum, which would be intensified by MBS duration shedding (curve gets sucked into convexity vortex. Lower and wider we go. This is "snowball selling"). In our opinion the more probable scenario is Congress fails to come to an agreement by August 2nd , forcing Treasury into so called “prioritization mode” to avoid default, which would soon be followed by another band-aid bill to raise the debt ceiling by just enough to get us into 2012 where Republicans would proceed to relentlessly hammer Obama’s tardiness on the issue before elections. If that scenario were to play out we wouldn’t necessarily be looking at a credit downgrade. It’s still 50/50 at that point, totally dependent on the credibility of whatever plan is being debated at the time and how quickly Congress acts to raise the debt ceiling (Congress would need to act quickly though because Treasury makes around 3 million payments per day and does not have the systems to "prioritize" payments). This would likely lead rates higher but would not result in all out capitulation in the bond market. More simply put, a jump in rates would be temporary. It seems like all you can do is stay nimble and hope politicians are smarter than they act. Unless you've got more than 30 days to float, this uncertainty makes "locking on application" a favored strategy.

(Reuters) - Wells Fargo & Co and the Department of Justice are negotiating to settle allegations that the bank illegally targeted African-Americans for expensive subprime loans, according to a source familiar with the matter. The source, who declined to be identified because the talks were not public, said the bank was talking with lawyers from the department's civil rights division. The case is separate from other government investigations of banks over mortgages, including a pending joint action by state attorneys general and another section of the Justice Department over foreclosure practices, such as robo-signing of documents for court cases. The talks follow Wells Fargo's agreement last week to pay an $85 million civil penalty to the Federal Reserve Board over allegations that it steered borrowers into costly subprime mortgages and falsified their financial qualifications. The Justice Department investigation was reported earlier by the Huffington Post. The Justice Department declined to comment. Wells Fargo spokeswoman Vickee Adams declined to comment on the civil rights case. She said the Federal Reserve case did not include allegations involving ethnic minorities. The bank continues to fight lawsuits brought by the cities of Baltimore and Memphis charging that the bank hurt them with subprime loans, Adams said.

(Reuters) - MERS, the electronic mortgage registry that faces multiple investigations for its role in thousands of problematic foreclosure cases, changed its rules to lower its profile in court-supervised foreclosures. Mortgage loan giants Fannie Mae and Freddie Mac and several of the largest U.S. banks established MERS in 1995 to circumvent the costly and cumbersome process of transferring ownership of mortgages and recording the changes with county clerks. In rule changes announced to MERS members on July 21, the company forbade members to file any more foreclosure actions in MERS's name. It also required mortgage servicers to obtain mortgage assignments and record them with county clerks before beginning foreclosures. Mortgage-loan servicers perform routine duties for the investment trusts that own pools of mortgages, including collecting mortgage payments and, when necessary, filing foreclosures. Although these trusts are legally required to own the mortgages when they file to foreclose, the servicers in many cases did not obtain documents known as assignments on their behalf until weeks or months after launching a foreclosure action in court. Under the new rules, servicers are required to stop filing foreclosures in MERS's name, but MERS's role in foreclosures won't actually be eliminated. The servicers will continue to obtain the needed mortgage assignments from MERS. In past cases examined by Reuters, such assignments have included ones of questionable legitimacy, such as mortgages owned by now-defunct lenders. MERS spokeswoman Janice Smith said the new rules make mandatory a trend that already was under way. She noted that Fannie Mae, Freddie Mac and several large banks already had stopped filing foreclosures in MERS name. Smith said the change would avoid confusing homeowners facing foreclosure by eliminating MERS, a company they had never heard of, from court documents.

Normally, MBS don't make gains as quickly as Treasuries into a rally, but Fannie 4.0's are making new highs this morning while 10yr notes for instance are well off theirs. Currently 4.0's are up 14 ticks at 100-23. Reprices for the better are entering the realm of possibility from early/aggressive lenders, but it's an outside possibility at best for now. 10yr notes are at 2.955, still in line with the levels seen before this morning's economic data.