MBS RECAP: Bonds Battle Back

As stocks have rallied this afternoon, bonds have been able to hold relatively sideways near their best levels. It's almost as if bonds "pause" to see if stocks can mount some sort of significant rally into the close, but in recent moments as stocks turned back from their highs, bonds were more than content for the lever to be connected in "rally mode." S&P moved from just over 1306 to 1302.77. With each tick down in stocks, 10yr notes ticked down in yield shortly thereafter, bringing the benchmark to its best levels of the day, currently at 3.363. MBS have been content to progress with the basis. FNCL 4.5's are up 10 ticks on the day now at 102-06. Reprices for the better have come in a constant stream and late day gains could draw out remaining fence-sitters or perhaps even "round 2's" in small amounts.

Benchmark 10yr notes had pushed into the 3.36's and FNCL 4.5's made it as high as 102-04 before stocks began rallying, with the S&P making it from 1297+ to 1301.55. In that process, MBS peeled off just one tick and 10yr yields rose to 3.3743. There isn't really any implication on reprices for the better and certainly not a new risk of reprices for the worse. Volume and volatility are dying down as the day gets closer to various closing times.

The bond market seems to be indicating that the S&P ratings news is a net positive as it increases the sense of urgency regarding budget revisions whereas stocks see it as negative any way you slice it. The S&P at 1298.4 is currently lower than the initial sell-off whereas bonds are at their best levels of the day. FNCL 4.5's are up 8 ticks at 102-04 and 10yr yields are 4.5 bps lower at 3.3688. Reprices for the better continue to trickle in.

*WHITE HOUSE SAYS BELIEVES U.S. POLITICAL PROCESS ON DEFICIT WILL OUTPERFORM S&P EXPECTATIONS *WHITE HOUSE SAYS OBAMA BELIEVES A DEAL ON DEFICIT CAN BE REACHED, HISTORY SHOWS REPUBLICANS AND DEMOCRATS CAN WORK TOGETHER * WHITE HOUSE SAYS BOTH SIDES NOW AGREE ON A TARGET OF DEFICIT REDUCTION OF $4 TRILLION OVER 10-12 YEARS * WHITE HOUSE SAYS ANY CALL FOR A BIPARTISAN AGREEMENT ON FISCAL REFORM IS WELCOME, S&P MOVE ADDS MOMENTUM TO THAT * WHITE HOUSE SAYS BELIEVES COMPROMISE BETWEEN REPUBLICANS AND DEMOCRATS ON DEFICIT IS WITHIN REACH

FNCL 4.5's are now up 6 ticks at their highs of the day, 102-02. 10yr notes are creeping in to their morning low yield range, currently at 3.389. A combination of Fed-Speak and ongoing announcements from the White-House among other things are contributing to the rally. Reprices for the better have been reported and more should follow as this morning's lows occurred slightly before many lenders released rates.

* IMF NOTE TO G20 SAYS RECOVERY IN ADVANCED ECONOMIES PROCEEDING 'TOO SLOWLY' * IMF SAYS WITHOUT REBALANCING IN UNITED STATES FROM DOMESTIC TO EXTERNAL DEMAND, GROWTH WILL REMAIN SUBDUED * IMF SAYS POLICY RESPONSE TO OVERHEATING IN EMERGING MARKETS 'REMAINS INADEQUATE' * IMF-CAPITAL INFLOWS TO EMERGING MKTS MODERATED, EVEN REVERSED IN SOME, BUT REMAIN HIGH AND VOLATILE * IMF-SOME EMERGING MARKETS DELAYING NEEDED MACROECONOMIC POLICY RESPONSES TO DEAL WITH CAPITAL INFLOWS * IMF-RESERVE BUILDUP IN SOME ASIAN COUNTRIES LEADING TO 'PERSISTENT, SIGNIFICANT FOREIGN EXCHANGE MISALIGMENTS" * IMF SAYS CHINESE YUAN 'REMAINS SUBSTANTIALLY UNDERVALUED' * IMF: REAL EFFECTIVE VALUES OF EURO AND JAPANESE YEN 'ARE BROADLY IN LINE WITH MEDIUM-TERM FUNDAMENTALS' * IMF SAYS DOLLAR REMAINS 'ON THE STRONG SIDE' OF FUNDAMENTALS * IMF-FURTHER DECLINE IN US DOLLAR AGAINST UNDERVALUED CURRENCIES WOULD HELP CUT US C/A DEFICIT * IMF-RISK OF NEAR-TERM OIL PRICE SPIKES BACK TO 2008 PEAKS 'HAS INCREASED MATERIALLY'

LOUISVILLE, Ky., April 18 (Reuters) - The Federal Reserve should not exclude food and energy from the inflation numbers it targets, and those figures have been rising recently, St. Louis Federal Reserve Bank President James Bullard said on Monday. While he did not explicitly repeat calls for potentially trimming the Fed's $600 billion, bond-buying stimulus program, Bullard did indicate he is beginning to worry about recent inflation readings, bolstered by rising energy costs. U.S. consumer prices rose 2.7 percent in the year to March, but the core measures, which excludes food and energy prices, climbed just 1.2 percent. But Bullard argued policymakers should target the overall number. "The 'core' concept has little theoretical backing," Bullard said in a presentation distributed to reporters. "Inflation and inflation expectations have recently moved higher." Bullard argued the underlying fundamentals for U.S. economic growth are strong despite signs that first quarter economic growth, now seen possibly coming in below 2 percent, looked much weaker than had been expected a few months ago. U.S. gross domestic product rose 3.1 percent in the fourth quarter. Unemployment, meanwhile, remains at an elevated 8.8 percent, though it has come down rapidly in recent months. Bullard said the major risks to the economic outlook, including political uprisings in the Middle East and North Africa, and Europe's sovereign debt crisis. would likely dissipate as the year progresses. Indeed, he expects U.S. job growth, which has been anemic in this recovery, to accelerate over coming months. Bullard said adopting an explicit inflation target would be a much better way to keep the central bank disciplined than some return to commodity-linked currencies. "Tying the currency to commodities when commodity prices are highly variable is questionable," he said. (Editing by Neil Stempleman)

Although Treasuries have not been able to crack in to their best levels of the morning under 3.39, MBS are doing slightly better with FNCL 4.5's currently at 101-31, 3 ticks up on the day. 10yr yields are at 3.408. S&P's seem to be putting in some lows just over 1296 and are currently at 1299.31