The stock lever had been fairly connected today until just recently. The S&P packed on a good 7 points in roughly the last 20 minutes but during that same time Benchmark Treasuries have barely budged and Fannie Mae 4.0 coupons shed a mere 2 ticks. That's not enough of a loss to deter any lenders from repricing for the better if they were planning on it 20 minutes ago. That said, not all lenders will be repricing for the better, although many already have. We'll be talking about this more at the beginning of next week, but current levels paint a disappointingly SIDEWAYS picture for bond markets. That's frustrating when we wear our market watching, analysis hats, but jim-dandy with the mortgage hats on because the sideways is occurring near the best levels of the year. Without yet knowing what will greet us in terms of market levels on Monday morning, for now, it looks like the discussion might center on what it could take to break out of this sideways rut, both on the upside and downside and what that might look like (so as to better identify opportunities or risks of either scenario).

(Reuters) - The U.S. Treasury said on Friday it would take the last step at its disposal to continue borrowing money in capital markets as Congress battles over raising the country's debt ceiling. The previously announced decision to stop investments into the Exchange Stabilization Fund, a pool of money set aside as a contingency for possible instability in currency markets, will give the Treasury an additional $23 billion of wiggle room in spending. "Congress must enact a timely increase of the debt ceiling," the Treasury said in a statement. (Reporting by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)

Despite warnings from Moody's and S&P regarding a US Credit Rating Downgrade if the debt ceiling isn't raised, Treasuries and MBS have been able to gain enough this afternoon to coax reprices for the better out of a few lenders. More could follow if current MBS levels are maintained or improved upon. Those levels are actually the best of the day with Fannie 4.0's up 6/32nds now to 100-29. 10yr notes had just touched their lowest yields of the day before breaking just slightly lower to 2.915, below a key long term trendline.

Boring... And somewhat frustrating is how we'd characterize the market's response to the European bank stress tests. Maybe this is because we'd hoped to get a bit more guidance with respect to the previous trading of the day, but rather than help prices or yields break higher or lower than pre-existing ranges, the stress-test reaction has simply injected a bit of volume in favor of heading back to the most central and equivocal parts of those ranges. To wit, 10yr yields could have broken below 2.92 on a favorable reaction, but instead bounced higher. However that bounce higher has already met with support from the 2.95 technical level that has mostly governed the range all week. That's about as equivocal of a response as we could have imagined. Can it really be that after this entire week of auctions, Bernanke testimony, Euro headlines, Stress Tests, and Econ Data that 10yr benchmarks are inching toward the door, bouncing on support at the exact same levels as 8am on Monday morning? Well, don't answer that... Because that's indeed what's happening. It's just boring, and lacking in a certain informative quality. Heck! With Fannie 4.0's up 3 ticks on the day at 100-26, sideways is fine with us in terms the MBS world, but we do wish the market would have done a better job of making up it's mind this week. Seems a bit anticlimactic this Friday.

Reuters) - Eight European banks are not strong enough to withstand a prolonged recession and need to raise 2.5 billion euros in capital, an industry health check aimed at reviving investor confidence showed on Friday. The "stress test" of 90 banks in 21 countries showed five banks in Spain, two in Greece and one in Austria failed the test. The European Banking Authority (EBA), the regulator running the test, said full details on the banks that failed will be released later. Between five and 15 smaller lenders had been expected to fail the test. All big banks passed, as expected. The International Monetary Fund has warned Europe it is taking too long to rebuild its banking system and the threat of the Greek debt crisis spreading to bigger countries such as Spain and Italy has further rattled investors. (Reporting by Huw Jones, editing by Mike Peacock)

(Reuters) - U.S. House Democratic Leader Nancy Pelosi said on Friday she hopes talks between President Barack Obama and congressional leaders on raising the $14.3 trillion U.S. debt limit will result in a a large deficit reduction plan. "We support our president for the grand bargain," Pelosi said at a news conference. "We hope that can still happen." She said Democrats would not support cuts to the Medicare health plan and Social Security retirement benefits to reduce deficits but would consider changes to strengthen those programs. (Reporting by Donna Smith; Editing by Bill Trott)

We'll focus on 10yr notes for a moment in order to benchmark the broader bond market. Earlier, 10's had been battling very short term resistance. After jumping to the highest yields of the week this morning, they knocked on the door to get back into yesterday's yields and were firmly denied for a short time. The logical thing finally happened on the Consumer Sentiment data and 10's finally broke that resistance. But after the last leg of mini-rallying, 10's find themselves bouncing on some LONG term resistance at a trendline that goes back to 2007/2008. In terms of history repeating itself, 10's bounce on this same trendline at the same point in the historical chart that lines up with current trading. If this isn't making sense, just think of "fractals." As history has repeated itself , sections of current trading and past trading could be snipped out of charts and if laid next to or on top of each other would look remarkably similar. Long story short, the big bounce in 2008 that matches up with the big bounce today is on the same trendline. Hope that makes sense. Ask for clarification if it doesn't and we'll dig into it in more detail. Moving on though... the implication is that we have some ongoing challenges this morning. We got through some previous resistance, but the market is telling us it won't be easy to rally down past 2.92 without some more guidance. Maybe that will come from Euro stress test results, or maybe from unscheduled headlines. Unless it happens, 4.0's are probably not heading much higher than 100-29, meaning that pricing isn't going to be improving much, if at all on first rate sheets. We'd need to break 100-29 to see reprices for the better become more than just an outside possibility.