Rates Drift Higher in Low Trading Volume. Keep an Eye on Stocks

Oil prices are up. Stock indexes are up. Treasury yields are up. MBS prices are not...

OVERNIGHT NEWS...

Fed Unlikely to Remove Its Economic Stimulus Just Yet: WSJ - Federal Reserve officials have grown more confident that a self-sustaining economic recovery is taking root in the U.S., but they want to see more evidence before they seriously consider how and when to pull back the enormous amounts of stimulus they pumped into the financial system.So when officials gather for their next policy meeting March 15, they are likely to decide to continue a $600 billion Treasury securities purchasing program. They are also likely to maintain a commitment to keep short-term interest rates near zero for an "extended period." Barring a surprising turn in the economy or inflation, it seems increasingly likely that the securities purchase program, known by some as quantitative easing, is likely to end in June as scheduled.

Obama Team Shoots Down Libya No-Fly Talk: (NPR) - Calls continued over the weekend for President Obama to use military force to support Libya's rebels in their fight to overthrow Libyan dictator Moammar Gadhafi. And the Obama Administration continued to shoot down such talk, indicating that the no-fly zone idea was itself not going to fly, at least not now. White House Chief of Staff William Daley acknowledged that the sanctions and international condemnation had so far done little to stop Gadhafi from using his advantages in air power to support his loyalist ground troops against overmatched rebels. But Daley made clear that it's unlikely the president will overrule his military advisers on this one.

U.S. could tap oil reserves as gasoline price surges: (Reuters) - The U.S. government reiterated that it could tap its strategic oil reserves in order to safeguard economic growth as surging gasoline prices increase pressure for action. While longstanding U.S. policy is to release reserves only in the event of a significant and immediate supply shortage, some analysts say the Obama administration may feel compelled to try to tamp down prices that are being fueled both by outages in Libya and concern unrest could spread in the Middle East. Reflecting market worries over unrest, crude futures prices were trading in Asia on Monday around their highest levels in more than two years.

Moody's downgrade tips Greece closer to brink: (Reuters) - Moody's slashed Greece's credit rating by three notches on Monday due to an increased default risk, raising the spectre that the distressed euro zone sovereign may have to restructure its debt, perhaps before 2013. The move increased pressure on euro zone leaders to ease repayment terms on bailout loans to Athens, just as Germany and its allies seem to have turned their backs on more radical steps to help it reduce its debt through bond purchases or buy-backs. Moody's Investors Service downgraded Greek debt to B1 from Ba1 -- lower than Egypt -- and said it may cut further, drawing an indignant protest from the Greek Finance Ministry. "The likelihood of a default or distressed exchange has risen since its last downgrade of the Greek government debt rating in June 2010," Moody's said in a statement.

Checking on the Markets....

The Shanghai Composite jumped 1.83% but the Hang Seng in Hong Kong shed 0.41%. Red was the dominant color in Japan. The NIKKEI lost 1.76% and the TOPIX dropped 1.46%. In London the FTSE is currently up 0.56%, the CAC is Paris is only 0.56% to the upside. In Germany the DAX is 0.84% better. Stateside, S&P futures are +1.50 at 1321.75.

Nervous tensions among S&P traders will grow quickly if 1300 is broken.

Benchmark TSYs have been unable to hold the positive progress that helped lead mortgage rates lower on Friday.  Benchmark yields drifted directionally higher in below-average overnight trading volume. The 2s/10s yield curve steepened 2bps in the process. With $66-billion in 3s/10s/30s on the auction block, we'd expect to see rally resistance in the days ahead, but the stock lever will play a large role in rates movement. Simply holding 3.56% support in 10s would be an encouraging sign though. Remember 3.56% is the middle of the 3.40 to 3.70% range we outlined last week. <---CHECK OUT THAT CHART.

The March delivery FNCL 4.5 MBS coupon is -5/32 at 101-23. After being awarded reprices for the better by lenders on Friday following a mixed but generally positive Employment Situation Report, rate sheets will be weaker to start the week.

Keep an eye on the stock lever.

HERE is the economic and events calendar for the week ahead.

HERE are our short-term technical targets.