After a stronger-than-expected Chicago PMI bond markets began to weaken, but had held within their 2-day range until the release of Bernanke's prepared speech. Though there were no major surprises in the testimony, Bernanke's mention of short term inflation increases was not guaranteed. Additionally, there was no reinforcement of the possibility of QE3. Fannie 3.5's are down 7 ticks to 103-12 but are a moving target at the moment. If you had a rate sheet already, expect reprices for the worse.

"In the housing sector, affordability has increased dramatically as a result of the decline in house prices and historically low interest rates on conventional mortgages. Unfortunately, many potential buyers lack the down payment and credit history required to qualify for loans; others are reluctant to buy a house now because of concerns about their income, employment prospects, and the future path of home prices. On the supply side of the market, about 30 percent of recent home sales have consisted of foreclosed or distressed properties, and home vacancy rates remain high, putting downward pressure on house prices. More-positive signs include a pickup in construction in the multifamily sector and recent increases in homebuilder sentiment..."

• RTRS - Chicago Purchasing Management Index 64.0 In February (Consensus 61.5) Vs 60.2 In January
• RTRS - Chicago Purchasing Mgmt New Orders Index 69.2 In February Vs 63.6 In January
• RTRS - Chicago Purchasing Management Prices Paid Index 65.6 In February Vs Vs 62.4 In January
• RTRS - Chicago PMI Employment Index 64.2 In February Vs 54.7 In January
• RTRS - Chicago Purchasing Management Production Index 67.8 In February Vs 63.8 In January
• RTRS - Chicago Purchasing Management Index At Highest Since April 2011
• RTRS - Chicago PMI New Orders Index At Highest Since March 2011
• RTRS - Chicago PMI Employment Index At Highest Since May 1984

The Chicago Purchasing Managers reported the February CHICAGO BUSINESS BAROMETER rose to its highest level in ten months. The barometer also marked a 29th month of expansion and its fourth consecutive month above 60. Increases were seen in six of eight Business Activity Indexes, highlighted by a very large advance in Employment.

Fannie Mae (FNMA/OTC) today reported a net loss of $2.4 billion in the fourth quarter of 2011, compared with a net loss of $5.1 billion in the third quarter of the year. The company’s net loss in the fourth quarter reflected $5.5 billion in credit-related expenses, the substantial majority of which were related to its legacy (pre-2009) book of business and due largely to a decline in home prices. These charges were partially offset by a growing percentage of net revenues from the company’s highquality new book of business.

For the full year of 2011, Fannie Mae reported a net loss of $16.9 billion, compared with a loss of $14.0 billion for 2010. The increase in the net loss for the year was due primarily to a $6.1 billion increase in net fair value losses in 2011. This resulted from losses in the company’s risk management derivatives in 2011 caused by a significant decline in interest rates during the year. These fair value losses on the company’s derivatives were offset by fair value gains during 2011 related to its mortgage investments; however, only a portion of these investments is recorded at fair value in its financial statements...

Roughly 3 hours before this morning's GDP release, the results were in for the much-anticipated 2nd round of the ECB's huge 3-yr refi operations (LTROs). The uptake of €529.5 bln was slightly more than expected and also higher than the €489.2 bln at the previous LTRO. The biggest change from last time however, was that 800 banks requested funds as opposed to 523 previously. Treasuries drifted higher to 1.96+ ahead of the news and fell back to 1.92's for the domestic open. MBS opened slightly higher at 103-21.

Despite the 0.2 pct "beat" on Q4 Preliminary GDP, bond markets are holding their gains. Immediately following the release, Treasury yields briefly ticked higher and MBS fell to 103-19, but that weakness proved transitory as both have regained previously strong levels. 10's are at 1.92 and Fannie 3.5's are up 5 ticks on the day at 103-24. S&P futures (June delivery) haven't exceeded 1368.5 since the LTRO results and bounced there in the initial post-GDP volatility.

The next "biggie" on the horizon is Bernanke's congressional report beginning at 10am. Before that, the last major manufacturing report of the week, Chicago PMI, is out at 9:45am.

Two big ticket events down and one to go... Given the magnitude of the response both in terms of volume and volatility, it seems clear that markets haven't yet seen that for which they are waiting.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.0 percent in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 1.8 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.8 percent.

The increase in real GDP in the fourth quarter reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the fourth quarter primarily reflected an upturn in private inventory investment and accelerations in PCE and in residential fixed investment that were partly offset by a deceleration in nonresidential fixed investment, a downturn in federal government spending, an acceleration in imports, and a larger decrease in state and local government spending.