MBS RECAP: IT'S ALL ABOUT THE RANGE

With the exception of a dominant top-tier "headline waiting to happen," tomorrow has it all: tons of econ data, several Fed speakers, and a stage that's set for an epic technical fight around 3.50 in 10yr notes. Whether or not the fighters deliver an epic performance remains to be seen, but it won't be for lack of information, both from tomorrow itself and the week as a whole. In terms of econ, we have CPI and Empire State survey at 830am, TIC data at 900am, Industrial Production at 915am, and Consumer Sentiment at 955am. Phew! That's a lot for a Friday. Fed's Evans and Hoenig will be on the wires at 1115am and 130pm respectively. With that sort of line up, it's not too hard to entertain the possibility that rather than the culmination of the auction cycle, bond markets may want to see what kind of weekly marks can be posted after the busy day of data plays out. In other words, thanks to action-packed Friday, it will play host to this week's "last shoe to drop" awards as opposed to the last Treasury auction on the previous day. 3.50 probably can't beat 3.42 in a one on one fight, but if tomorrow's econ data jump in the fight and side with 3.50 support, things look a bit more evenly balanced. Ultimately, the scorecard may need to be reviewed by "the judge" - aka, stocks. Sounds strange? A bit, but it seems that bonds want stocks to look like they're breaking lower past recent support (low 1300's in the S&P) before committing to any more rally.

By the end of the day, we'll be very close to the highest day of volume since the mighty March 16th totals flew straight off the charts. The two biggest volume spikes of the afternoon center on 3.46 and 3.50 and effectively are trying to contain yields inside those levels. Yesterday had a noticeably thick band of volume centered on a particular level. That yield? The same 3.50 that garnered the heaviest support after the auction today. Risks of reprices for the worse are abating as MBS skid sideways in line with their pre-auction lows between 101-14 and 101-15. We don't want to frame current movements in an overly-optimistic way, but without going so far as to say that it's indicative of a rally, we can at least say that the glimmer of hope for a recovery in rates is by no means extinguished with today's late losses. Quite the opposite in fact as longer term charts give the distinct impression of breaking through 3.50, meeting big resistance at 3.42, and returning to 3.50 for support confirmed by volume. So it seems that underlying preference for 10yr notes is bookended on one side by 3.50 and on the other by 3.42. Temper optimism with the fact that 3.42 is much stronger as far as technical levels go. The point is simply this: while bonds lost ground this afternoon, they did so with a nice show of support for a logical technical level at 3.50. The hopeful can keep hoping, and the lock-biased can fear a 3.50 breakout that could lead MBS quickly back into the low 101's.

The post auction rally was brief. Benchmark 10s are backing up to test key support at 3.50% and FNCL 4.5 MBS coupons have fallen to new intraday price lows. Loan pricing was improved vs. indications yesterday. This makes reprices for the worse highly likely.

Somewhere between 3.455 and 3.46 lies a highly positively charged magnetic field. Around this field moves the charted line of 10yr Treasury yields. That line also has a positive charge: it gets close, it bounces or squeezes rapidly through to the other side. This technical level repelled rally attempts yesterday and supported against selling this morning before finally giving way, allowing yields to shoot up to 3.487. After the auction, this was the exact target of a rapid move lower in yield. But rather than move through to lower yields, it has provided a big resistant bounce this afternoon, sending yields higher again. 10's are currently at 3.473 after nearly touching 3.48, effectively counteracting a majority of the post-auction rally. MBS haven't taken it quite as badly, falling from 101-18 to 101-16. This reduces the likelihood of ongoing reprices for the better today and once again sets loan pricing up to head out the door in roughly the same shape as last night.

* FED'S PLOSSER SAYS U.S. MONETARY POLICY WILL NEED TO REVERSE COURSE IN NOT-TOO-DISTANT FUTURE * FED'S PLOSSER: 'AMPLE EVIDENCE' ECONOMY IS ON THE MEND, MODERATE BUT SUSTAINABLE RECOVERY IS UNDERWAY * FED'S PLOSSER: NEED TO ENSURE THAT OIL, COMMODITY PRICE RISES WON'T BOOST GENERAL INFLATION RATES * FED'S PLOSSER: INFLATION DISTORTS SUPPLY, DEMAND SIGNALS IN COMMODITY MARKETS * FED'S PLOSSER: TIME IS RIGHT TO ADOPT EXPLICIT U.S. INFLATION TARGETS * FED'S PLOSSER SAYS DOES NOT BELIEVE U.S. IN IMMINENT DANGER OF STRONG ACCELERATION IN INFLATION

Treasury just auctioned $13 billion 30 year bonds. Demand was strong and rates are rallying in the aftermath. The bid to cover ratio came in at 2.83 bids submitted for every 1 accepted by Treasury. While that failed to match the 3.02 btc ratio seen in March, it was still well above-average. When measuring bid-side interest based on prices paid, buyers were willing to pay up for this issue. Demand was again strong as the auction high yield was 2.8bps below the 1pm "When Issued" yield, indicating someone wanted this inventory! Who was it? Indirect accounts demonstrated an obvious willingness to chase yield, taking home 47.2% of the competitive bid and 72.3% of what they bid on. Both metrics were above average. Directs were also willing participants, taking down 10.8% of the offering and 26.9% of what they bid on. Again, both metrics were above-average, albeit only slightly. That left primary dealers to absorb the remaining 42%...which was easily accomplished. Plain and Simple: This was a strong auction, likely as a result of traders covering short positions and real money accounts chasing higher coupon returns outright vs. the rest of the curve. The pre-auction rates sell-off seems to have made that possible, totally the opposite of yesterday's expensive 10-year note fundraiser.

As yields rose heading into the auction, we said "If, however, the auction is bond-market positive, yields could snap back lower quite quickly, especially if stocks weaken." Although we do not yet have an appreciable weakening of the stock market, yields indeed snapped back, moving from just under 3.49 to the mid 3.45's in moments. FNCL 4.5's from 101-13 to 101-17. Is that enough to see reprices for the better? Not quite yet... Perhaps if 101-17 held steady for an hour or so, then lenders who had earlier repriced for the worse might give some back, but we need to get closer to 101-20 before that becomes a widespread phenomenon. For now, without the aforementioned stock market weakness, the high 3.45's/3.46 level looks to be getting the nod as both a long and short term pivot point that bonds are hesitant to cross (note that they avoided it at all costs yesterday). Pretty simple outlook at this point. Yields should be contained under 3.50 and over 3.45+/3.46 until/unless stocks head back past their 11:45am lows.

WASHINGTON, April 14 (Reuters) - A U.S. budget deal that includes $38 billion in spending cuts actually would reduce government spending by only $20 billion to $25 billion in the coming 10 years, the nonpartisan Congressional Budget Office said ahead of a vote in the House of Representatives. Many of the cuts included in the budget deal would have little or no effect on how much money the government actually spends, the CBO said, because they come from programs that normally lie beyond the reach of the annual budget cycle. (Reporting by Andy Sullivan; Editing by Bill Trott)

After breaking the 3.47 level, 10yr notes have moved up to the next mini-target at 4.483 and are currently testing there. A break would hearken 4.49's potentially. Are we bothered by this? Not especially. Why? in the slightly bigger picture, we were at 3.59 on 4/11 and moved all the way to 3.42 in 3 days. A bit of a pull back is necessary (extremely so) if we're to see any measure of sustainability at current levels. That doesn't help short term implications much though.... With FNCL 4.5's down 4 ticks on the day at 101-14, at least one reprice for the worse has been seen and more should be expected ahead of the auction. If, however, the auction is bond-market positive, yields could snap back lower quite quickly, especially if stocks weaken.

After getting a strong bounce off 3.46, 10yr notes moved back down to the 3.44's. There's not much they can do moving lower except head back to 3.42. It's not time for that yet, so the next move is to 3.47, one of the short term variants around the 3.46 technical level. These recent movements in TSY's are much more disconnected from stocks than most other trading action of late, and thus a confirmation of the technical factors in play. FNCL 4.5 MBS are now down 1 tick on the day at 101-17, very close to the 101-16 reprice risk level we outlined this morning. When we approach such levels, it becomes a risk for early and/or aggressively priced lenders to reprice for the worse. Of course, the further prices fall the more likely reprices are to become widespread.