MBS RECAP: Up Down, Up Down

(IRS) - Hiding income in offshore accounts, identity theft, return preparer fraud, and filing false or misleading tax forms top the annual list of “dirty dozen” tax scams in 2011, the Internal Revenue Service announced today. “The Dirty Dozen represents the worst of the worst tax scams,” IRS Commissioner Doug Shulman said. “Don’t fall prey to these tax scams. They may look tempting, but these fraudulent deals end up hurting people who participate in them.” The IRS works with the Justice Department to pursue and shut down perpetrators of these and other illegal scams. Promoters frequently end up facing heavy fines and imprisonment. Meanwhile, taxpayers who wittingly or unwittingly get involved with these schemes must repay all taxes due plus interest and penalties. CHECK OUT THE VIDEO: http://www.youtube.com/watch?v=10D1XqVmIW0

It was a rough Thursday for everyone without any Fed-Speak from Lockhart... We've built up a tolerance/addiction with 3 out of the last 4 days, but thankfully, he's back tomorrow at 8am. It's a good thing too since Wholesale Trade is the only scheduled data point at 1000am. Then again, who really cares about econ when the fate of the Nation is at stake? No doubt the morning will greet you to fresh and unimaginable headlines regarding the budget battle, Middle-East drama, and who knows what else. One thing's for sure, technicals and UNscheduled data rule the roost, and tomorrow will likely be no exception.

"Consumer credit increased at an annual rate of 3-3/4 percent in February 2011. Nonrevolving credit increased at an annual rate of 7-3/4 percent, while revolving credit decreased at an annual rate of 4 percent," according to to Fed. This marks the 5th consecutive gain in Consumer Credit and now stands at its highest mark since June 2008. A trend of non-revolving credit leading overall gains is firmly established as consumers continue to cut back on credit card spending.

This is one reason why we still think interest rates have another run lower left in the tank. Higher oil prices tighten the margin squeeze on main street and slow the economic recovery. GDP downgrades are coming.... ///// (MarketWatch) -- Crude-oil futures topped $110 a barrel on the New York Mercantile Exchange, hitting their highest level in 30 months. Momentum-buying as the end of floor trading approached carried prices all the way to $110.26, the highest since Sept. 22, 2008, when prices hit an intraday high of $130 a barrel. May crude /quotes/comstock/21n!f:cl\k11 (CLK11 110.11, +1.28, +1.18%) kept the momentum going and at last check added $1.19, or 1.1%, to $110.01 a barrel on Nymex.

(Reuters) - Gold hit a fresh record high near $1,465 an ounce on Thursday after European Central Bank president Jean-Claude Trichet indicated the rate hike announced by the bank earlier may not be the first in a series. Spot gold hit a record $1,464.80 an ounce and was bid at $1,460.50 at 1420 GMT, against $1,457 late in New York on Wednesday. U.S. gold futures for June delivery were up $3.80 an ounce to $1,462.30, having peaked at $1,467. The ECB lifted interest rates by 25 basis points on Thursday as expected, but Trichet said in a press conference after the move that the bank had not taken the decision as the first in a string of such moves. "The market had factored in that Trichet would be a bit more hawkish in his comments," said Peter Fertig, a consultant at Quantitative Commodity Research. "If you look at government bond markets, they all recovered during his press conference." "Of course they will be vigilant in monitoring inflation developments very closely. But it is more inflation expectations that made the ECB concerned, and less the actual increase (in inflation)." Gold tends to suffer in a rising interest rate environment, as this raises the opportunity cost of holding non-interest bearing bullion. Expectations for a rise in euro zone rates kept a lid on gold's rally to record highs earlier this year. (Reporting by Jan Harvey)

There are cuter couples out there, but if today's performance is used as a benchmark, none are more closely joined. But far from holy matrimony, this relationship is all about the uncertainty that pervades markets amidst the deluge of economic data, headline news, geopolitical risk, budget battles, Fed Policy speculation, and market technicals just to name a few. We've rarely seen the two with a higher degree of positive correlation. That means that we can observe not only fixed income market technicals and tradeflows, but must also consider the same for stocks. Perhaps the ongoing struggle of the S&P right at the extremely important 1333 level is adding to pervasive sense of uncertainty. Just picture the two markets as youth soccer players... The ball has been kicked high into the air and the two youngsters have their hands on each others shoulders with their eyes toward the sky, neither looking at the ground in front of their own feet, but ensuring they stay close enough together so that when the next stage of the game happens, neither has over-committed in the wrong direction. Uncertainty at it's finest... By way of a specific market update, TSY's and MBS are a bit weaker at the moment, with 10's pushing 3.57 and FNCL 4.5's back down to 101-09. Though we've recently witnessed at least one reprice for the better, some lenders might consider reprices for the worse if these levels persist or deteriorate.

(Reuters) - The U.S. economy is recovering well, raising inflation risks that could force the Federal Reserve to raise interest rates before the end of the year, Richmond Fed President Jeffrey Lacker said on Thursday. "Rate hikes by year end are certainly a possible outcome given what we see with momentum in economic growth and given how inflation risks seem to have evolved," Lacker, an inflation hawk, told reporters after a speech. He argued that inflation risks have picked up in the last six months, and that central bank officials need to remain vigilant that the rise does not gain further traction. Lacker said he had still not made up his mind on the ideal course of action when the Fed does begin removing some of the extraordinary stimulus it offered the economy in the wake of the most severe financial meltdown in generations. He did however say selling some of the Fed's mortgage-backed securities, something recently proposed by Philadelphia Fed President Charles Plosser, was a good idea. "The housing finance market can easily withstand a substantial liquidation of our MBS holdings," Lacker said. In response to the crisis and the ensuing recession, the Fed has bought well over $2 trillion in mortgage and government bonds. Lacker favors a return to holding only Treasuries, since he worries that the housing bond buys blurred the line between monetary and fiscal policy. The U.S. economy expanded 3.1 percent in the fourth quarter, a solid clip but not enough for a country still digging its way out of a deep hole. The U.S. unemployment rate has come down rather rapidly in recent months, but remains at an elevated 8.8 percent.

A relative lack of data combined with headline shockers (Japan Quake), a convulsive stock market, the ongoing budget battle, and a vast barge of technical and fundamental considerations have Treasuries and MBS absolutely reeling with volatility this morning. After stocks began to sink back toward their lowest, knee-jerkiest levels of the day, TSY yields followed and 10's fell to nearly 3.52. But stocks bounced before matching those lows, so naturally, yields had to bounce as well. Or was that due to everything else bonds have on their mind? Wherever the truest truths lie, all we can really do right now is keep you updated on movements. With that in mind, bonds have moved... From those 3.52-ish lows,10yr yields are back up at 3.55, maybe bouncing, maybe breaking... Who knows... The only certainty is that, as of this particular moment in time, 10yr yields are basically unchanged day-over-day, and FNCL 4.5's are 1 tick better at 101-10. HOWEVER, please note the disconnect in current MBS levels and loan pricing. It's 7bps weaker on average today despite the sprinkling of green on screens. Reprice possibility? Maybe? Then again, prices could be very different in mere seconds, and then of course, would move on to a completely different level. Buckle up... Could be additional bumps in the road today.

So far, the response to news of a new earthquake in Japan has had the most pronounced effect in stock markets with the S&P initially shedding 10 points, bringing it to levels not seen since before Friday's NFP. While 10yr notes also fell in yield, it wasn't at the same frantic pace seen in stocks, moving only from 3.57 to 3.535. Both sides of the market have moderated as additional mitigating circumstances in Japan become known, 10yr yields up to 3.541 and S&P's off the 1327 lows up to 1332.62. Whereas Treasuries are calmer than stocks, MBS are calmer than Treasuries to a similar degree, with FNCL 4.5's currently up 2 ticks at 101-11. Though the circumstances are grim, this effectively reduces the previously noted reprice risk. We'd watch previous low yields in TSY's for a potential early indication of further MBS gains, and would watch yesterday's lows in stocks for a potential early indication of further TSY gains. It's a vicious love triangle. If that situation pans out, and levels hold for more than a fleeting moment, risks of reprices for the worse now become potential of reprices for the better, though most lenders will need to see more gains and need to see them hold for an hour or more before jumping on a reprice bandwagon.

11:06 EDT - MOST U.S. ECONOMIC DATA WOULD NOT BE RELEASED IN THE EVENT OF A GOVERNMENT SHUTDOWN -U.S. OFFICIAL ------- We just have the one "snippet" on this topic right now, but the implications are self-explanatory. With scheduled economic data being one of the key drivers of trade in the bond markets, this could obviously create some ambiguity / volatility in observing cause and effect relationships between economic events and movements in bond markets.

*** FITCH SAYS LIKELIHOOD "EXTREMELY LOW" U.S. GOVERNMENT FAILS TO HONOR FINANCIAL OBLIGATIONS IN RELATION TO DEBT CEILING *** FITCH SAYS BRINKMANSHIP OVER THE DEBT CEILING AND THE 2011 BUDGET WILL BE RESOLVED *** FITCH SAYS GREATER THREAT TO U.S. FINANCIAL STABILITY, 'AAA' STATUS IS FAILURE TO AGREE A "CREDIBLE MEDIUM-TERM FISCAL CONSOLIDATION STRATEGY"

TOKYO, April 7 (Reuters) - A strong earthquake of magnitude 7.4 shook northeast and eastern Japan late on Thursday, and a tsunami warning was issued for the northeastern coast of Japan, an area badly hit by the March 11 earthquake. Japan's NHK public television repeatedly said those in areas where the tsunami warnings were issued should evacuate to higher ground. (Reporting by Chizu Nomiyama; Editing by Daniel Magnowski) *** EARTHQUAKE SHAKES BUILDINGS IN TOKYO - WITNESSES *** JAPAN NHK TV SAYS TSUNAMI WARNING ISSUED FOR NORTHEAST JAPAN COAST AFTER QUAKE, TSUNAMI 1 METER HIGH EXPECTED *** JAPANESE QUAKE WAS 7.4 MAGNITUDE - U.S. GEOLOGICAL SURVEY

*** IMF REPORT-RISING TREND OF OIL PRICES SUGGESTS WORLD OIL MARKET HAS ENTERED PERIOD OF INCREASED SCARCITY *** IMF-RISE IN TENSIONS BETWEEN DEMAND AND SUPPLY COULD FORCE OIL PRICE SPIKES *** IMF-GRADUAL AND MODERATE RISES IN OIL SCARCITY WILL HAVE SMALL IMPACT ON MEDIUM-TERM GLOBAL GROWTH

*** - U.S. TREASURY SAYS ESTIMATES $19.2 BLN OF COUPON SECURITIES HELD BY PUBLIC MATURING ON APRIL 15 *** US TO SELL $32 BLN 3-YR NOTES APRIL 12, $21 BLN REOPENED 10-YR APRIL 13, $13 BLN REOPENED 30-YR BONDS APRIL 14, TO SETTLE APRIL 15 *** U.S. TO SELL $32 BLN 3-MONTH, $30 BLN 6-MONTH BILLS APRIL 11, TO SETTLE APRIL 14