MBS MID-DAY: 2/10/2011

Treasury note yields are determined by the issue's coupon rate, maturity, and face value. When the coupon rate is below what investors consider current market "par value", the price to buy that fixed income security falls and yields rise to attract buyer demand. When the coupon rate is above what investors deems current market "par value", the price to buy that fixed income security rises and yields fall as buyers take advantage of a bargain buy. Today you are seeing the impact of a change in the coupon rate on the 10 year Treasury note. This change occurred yesterday when Treasury issued new 10 year notes and repriced the coupon to better reflect current market "par value" (par risk free yield at 10yr spot on the yield curve). The coupon changed from 2.625% to 3.625%. Yesterday the price to purchase a 10 year note was in the 91 price handle. This reflected the well below market coupon rate of 2.625%. Today the new coupon is 3.625% and the current price reflects the new "par value" of that coupon. The large day over day change reflects the price difference between the two coupons. Because it is the first day of trading for the new 3.625% coupon, we have no previous day's price to compare today's price to...so the day over day change is not an apples to apples comparison. Plain and Simple: IGNORE THE 10 YEAR PRICE CHANGE COLUMN TODAY!

WHOLESALE INVENTORIES +1.0 PCT (CONSENSUS +0.7 PCT) VS NOV UNCHANGED (PREV -0.2 PCT) *** WHOLESALE SALES +0.4 PCT (CONSENSUS +1.3 PCT) VS NOV +1.9 (PREV +1.9 PCT) *** DEC STOCK/SALES RATIO 1.16 MONTHS' WORTH VS NOV 1.15 MONTHS *** TOTAL INVENTORIES AT $430.5 BLN, HIGHEST SINCE JAN 2009; WHOLESALE SALES AT $371.5 BLN, HIGHEST SINCE AUG 2008

With wholesale inventories coming up at 10am, bond markets continue to hold on to levels just on the bright side of recent pivot points. For 10yr notes, this centers on 3.685. FNCL 4.5's are currently down 4 ticks at 100-04 with a few support bounces seen at 100-03.

FNCL 4.5's are down 5 ticks at 100-03 and 10yr yields are at 3.685. Most of the losses in MBS have come in the past few minutes, but there has certainly been support seen at these levels. This also coincides with a small range of yields (3.68 to 3.69) marking a pivot point for 10yr notes over the past several days. So with the combination of factors: A) relatively early in the morning still (many lenders haven't released rates yet), B) only six ticks down,and C) showing some support around pivot points, reprice risk isn't really on the scene so far this morning. But stay alert! Just because eyes are on the 30yr auction at 1pm doesn't mean we couldn't see something shake things up before then.

Despite Jobless Claims falling to a two and a half year low, MBS and Treasuries remain largely sideways this morning. All across the MBS coupon stack, prices haven't changed by more than 2 ticks. FNCL 4.5's, for instance, are down a tick at 100-07. This is in line with the range that marked their best levels yesterday.

US JOBLESS CLAIMS FELL TO 383,000 FEB 5 WEEK (CONSENSUS 410,000) FROM 419,000 PRIOR WEEK (PREVIOUS 415,000) *** 4-WK AVG FELL TO 415,500 FEB 5 WEEK FROM 431,500 PRIOR WEEK (PREV 430,500) *** CONTINUED CLAIMS FELL TO 3.888 MLN (CON. 3.900 MLN) JAN 29 WEEK FROM 3.935 MLN PRIOR WEEK (PREV 3.925 MLN) *** INSURED UNEMPLOYMENT RATE UNCH AT 3.1 PCT JAN 29 WEEK FROM 3.1 PCT PRIOR WEEK (PREV 3.1 PCT) *** JOBLESS CLAIMS LOWEST SINCE WEEK ENDED JULY 5, 2008 (371,000)