MBS MID-DAY: Near Intraday Highs

FNCL 4.5's are up 15 ticks on the day now to 100-16. This is more than enough for lenders who priced early to reprice for the better or at the very least for opening rate sheets to be improved over yesterday. With respect to the continuation of the rally, on hourly studies, we really don't have a lot of information to indicate resistance at this point. we see the break below 3.63 in 10yr yields and that's about it. It's all about how many clicks the bond market can ratchet down now, without retracing back over each new pivot. The goal is 2 steps forward, one step back, support bounce on most recent resistance bounce, break lower, rinse, repeat. We'll get our indication of where technicals are based on how that "ratcheting" plays out

In a testament to just how bent-out-of-shape the market has been recently concerning inflation, the bond market is improved after Consumer Sentiment beat it's estimate (75.1 vs 75.0). This is the highest reading since June 2010. But several internal components may help bonds. The Expectations index was lower this month (67.6 vs 69.3). An even bigger drop was seen in the 12 month economic outlook component which fell to 78 vs January's final reading of 87. But perhaps most important of all is the inflation expectations indexes for both 1 year and 5 year time frames. BOTH were UNCHANGED. This is a big deal in the current economic environment where the "i-word" is making a resurgence, and also important to see in the same survey where expectations declined as it suggests consumers revised their expectations lower for other reasons.

With respect to the last live update, which mentioned the important resistance soon to be faced by bonds, we may be seeing that "test" play out right now. After rallying this morning , 10yr yields bounced at 3.638, which is almost our exact technical target. Whether or not yields make it lower today may have something to do with the upcoming Consumer Sentiment report at 955am, the last data of the morning. Be prepared for movements in either direction.

With a few more ticks of positive movement in bonds, the 10yr note would test the exceedingly important 3.636 level which has been FIRM resistance since 2/4. The corresponding level in FNCL 4.5's is 100-12, and we're only a tick away from it at the moment. The massive looming risk is that the recent consolidating pattern in bonds could be seen as another bearish continuation pattern (bear pennant in this case), given that the most significant SUPPORT level lies at 3.85. If bonds test and fail a break to better levels, that risk increases, and any gains on rate sheets due to the morning rally should be heavily considered from that tactical vantage point.

08:33 11Feb11 RTRS-GEITHNER-WE WANT PRIVATE MARKET TO PLAY THE DOMINANT ROLE IN MORTGAGE FINANCE.......08:34 11Feb11 RTRS-GEITHNER-WILL MOVE CAREFULLY SO AS NOT TO IMPEDE PROCESS OF REPAIR IN HOUSING MARKET......08:34 11Feb11 RTRS-GEITHNER-COST OF MORTGAGES WILL RISE MODESTLY OVER LONG-RUN - CNBC.....08:36 11Feb11 RTRS-GEITHNER-IMPORTANT CONGRESS LEGISLATES SOMETIME OVER THE NEXT TWO YEARS

***US DEC TRADE DEFICIT $40.58 BLN (CONSENSUS $40.40 BLN) VS NOV DEFICIT $38.32 BLN (PREV $38.31 BLN) *** EXPORTS +1.8 PCT VS OCT +1.0 PCT, IMPORTS +2.6 PCT VS NOV +0.8 PCT *** GOODS DEFICIT $53.56 BLN, SERVICES SURPLUS $12.98 BLN *** EXPORTS $162.96 BLN VS NOV $160.15 BLN, *** IMPORTS $203.55 BLN VS NOV $198.46 BLN *** DEC CAPITAL GOODS IMPORTS $39.65 BLN VS NOV IMPORTS $40.12 BLN ***OPEC DEC TRADE DEFICIT $8.31 BLN VS NOV DEFICIT $6.97 BLN *** OIL IMPORT PRICE $79.78/BBL, HIGHEST SINCE OCT 2008, VS NOV $76.81/BBL, +9.1 PCT FROM DEC 2009 $73.14/BBL *** 2010 TRADE DEFICIT +32.8 PCT TO $497.82 BLN FROM 2009 $374.91 BLN; 2010 SERVICES SURPLUS RECORD HIGH $148.72 BLN *** TOTAL EXPORTS HIGHEST SINCE JULY 2008, IMPORTS HIGHEST SINCE OCT 2008 *** 2010 DEFICIT WITH CHINA $273.07 BLN, HIGHEST ON RECORD

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