Fannie 4.0s have fallen to levels just on the edge of negative reprice risk for some lenders. This heavily depends on the time of day that an initial rate sheet came out. Fannie 4.0s are up 4 ticks on the day, but down 4-5 ticks from the morning's highs and 3-4 ticks from the first wave of lender rate sheets.

If we leveled-off here for the day, we'd probably avoid reprices, but the risk that we won't is reinforced by 10yr yields prodding at their highest levels of the day. Just as momentum carried us in one direction earlier today, it can take on a life of its own if it begins heading too far in the other direction. 10's are currently still 4 bps lower on the day, but up from 2.80 to 2.817 in the past hour.

A potential budget deal in the Senate may contribute to selling pressure if more developed headlines come across.

Just a heads up that we're 4 ticks off the highs of the day in Fannie 4.0s, though only 2-3 ticks off rate sheet print time levels depending on the lender. That almost certainly precludes any price-based reprice risk unless we were to see another 2-3 ticks of weakness.

Treasuries and MBS turned the corner together right after 12:30pm. The day's second round of Fed Treasury buying gave way to a bit of volatility heading into 2pm, and 10yr yields broke over 2.85. After a quick bounce, they've back up to 2.855 currently and Fannie 4.0s are down to 102-27 (still 2 ticks into positive territory on the day).

Markets may be starting to think about Treasury supply coming up during the next three days and if 10yr yields break their highs, it could be one of those situations where MBS quickly follow. 10's are RIGHT THERE at the moment, so things could change quickly if yields rise any more.

WASHINGTON – Today the Department of Housing and Urban Development (HUD) announced that it will implement new FHA single-family loan limits on January 1, 2014, as specified by the Housing and Economic Recovery Act of 2008 (HERA). Read FHA’s mortgagee letter detailing the agency’s new loan limits.

“As the housing market continues its recovery, it is important for FHA to evaluate the role we need to play,” said FHA Commissioner Carol Galante. “Implementing lower loan limits is an important and appropriate step as private capital returns to portions of the market and enables FHA to concentrate on those borrowers that are still underserved.”

The current standard loan limit for areas where housing costs are relatively low will remain unchanged at $271,050. The new national-ceiling loan limit for the very highest cost areas will be reduced from $729,750 to $625,500. Areas are eligible for FHA loan limits above the national standard limit, and up to the national ceiling level, based on median area home prices. Additional information and loan limit adjustments for two-, three-, and four-unit properties, and in Special Exception Areas, are noted in FHA’s mortgagee letter. An attachment to the Mortgagee Letter provides information on which counties are eligible for loan limits above the national standard. Borrowers with existing FHA insured mortgages may continue to utilize FHA’s Streamline refinance program regardless of their loan balance. The changes announced today are effective for case number assignments between January 1, 2014, and December 31, 2014.

Full mortgagee letter HERE.

- Sentiment 82.5 vs 76.0 forecast
- Current conditions 97.9 vs 90.0 forecast
- Both at highest levels since July
- Market Reaction: traders are probably discounting a lot of this positivity due to gas prices. Bond markets head-faked toward weaker territory but are now at better levels than those seen before the data.

(Reuters) - U.S. consumer sentiment surged in December as Americans' outlook on the economy and job prospects improved, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment jumped to 82.5 for December, up from a final reading of 75.1 in November. This was the highest reading for the index since July, and topped analyst forecasts for a reading of 76.

"All of the improvement was among households with incomes below $75,000, with upper income households showing no gain from last month’s reading," survey director Richard Curtin wrote in a statement.

RTRS - U.S. NOV NONFARM PAYROLLS +203,000 (CONSENSUS +180,000) VS OCT+200,000 (PREV +204,000), SEPT +175,000 (PREV +163,000)

RTRS - U.S. NOV JOBLESS RATE 7.0 PCT, LOWEST SINCE NOV 2008 (CONSENSUS 7.2 PCT) VS OCT 7.3 PCT (PREV 7.3 PCT)

RTRS - U.S. LABOR FORCE PARTICIPATION RATE 63.0 PCT IN NOV VS 62.8 PCT IN OCT

RTRS - US NOV PRIVATE SECTOR JOBS +196,000 (CONS +180,000), OCT +214,000 (PREV +212,000)

RTRS - U.S. NOV GOVERNMENT JOBS +7,000 VS OCT -14,000 (PREV -8,000)

RTRS - U.S. NOV AVERAGE HOURLY EARNINGS ALL PRIVATE WORKERS +0.2 (CONS +0.2 PCT) VS OCT +0.1 PCT (PREV +0.1 PCT), TO $24.15 VS OCT $24.11; NOV YEAR-ON-YEAR EARNINGS +2.0 PCT

RTRS - U.S. NOV AVERAGE WORKWK ALL PRIVATE WORKERS 34.5 HRS (CONS 34.5 HRS) VS OCT 34.4 HRS (PREV 34.4 HRS), FACTORY 41.0 VS 40.9, OVERTIME 3.5 VS 3.4

RTRS - U.S. NOV FACTORY JOBS +27,000 (CONS. +10,000) VS OCT +16,000 (PREV +19,000)

RTRS - U.S. NOV GOODS-PRODUCING JOBS +44,000, CONSTRUCTION +17,000, PRIVATE SERVICE-PROVIDING JOBS +152,000, RETAIL +22,300

RTRS - U.S. NOV AGGREGATE WEEKLY HOURS INDEX FOR ALL PRIVATE WORKERS +0.5 PCT VS OCT +0.1 PCT The unemployment rate declined from 7.3 percent to 7.0 percent in November, and total nonfarm payroll employment rose by 203,000, the U.S. Bureau of Labor Statistics reported today. Employment increased in transportation and warehousing, health care, and manufacturing.

Following this morning's shake-up over the stronger-than-expected GDP and Jobless Claims data, bond market trading has proceeded in a rather uneventful fashion, but has slowly and steadily wound its way back in a more positive direction. Some of this has to do with the preexisting technical environment that we discussed in this morning's commentary. The gist there was that bonds have sold-off sufficiently ahead of NFP and the default momentum today would be sideways.

The other factors were the counterpoints in both of this morning's data sets. GDP could be somewhat discounted due to inventory building and Claims due to seasonal factors (yes, claims are seasonally adjusted, but the Labor Department noted that the seasonal adjustments were difficult to apply due to the holiday).

Whatever the mix of those factors might be, they've certainly added up for steady retracement back toward unchanged levels. After being as low as 103-10, Fannie 4.0s are back within 1 tick of unchanged at 103-18. 10yr yields are only 1bp off unchanged at 2.8516.

- GDP +3.6 vs +3.0 forecast
- Consumer Spending +1.4, lowest since Q4 2009
- Business Inventory buildup added 1.68 to GDP
- Inventory change adds most to GDP since Q4 2011
- market reaction: A strong headline, but not without some "yeah buts." Bond markets seem to be conveying this with an initial spike into weaker territory followed by better support than we would typically expect based on the headline alone.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.6 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.8 percent (see "Revisions" on page 3). With this second estimate for the third quarter, the increase in private inventory investment was larger than previously estimated.

The increase in real GDP in the third quarter primarily reflected positive contributions from private inventory investment, personal consumption expenditures (PCE), exports, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and in nonresidential fixed investment.

Fannie 4.0s are right in line with the prices seen immediately following this morning's weaker-than-expected ISM data (103-16). They've held between there and 103-13 ever since. If anything, they're erring toward the highs as we work our way through after hours for bond markets (3pm-5pm).

That strength is more a factor of their relative outperformance of a more decidedly flat/neutral Treasury complex. 10's aren't nearly as close to their best post-10am levels. In other words, after nearly two weeks of MBS getting trounced by Treasuries, we have a bit of a correction over the past 5 and a half hours. Not much else to it, and certainly nothing significant, though the stability has afforded a few lenders the opportunity to reprice positively.

- ISM Services PMI 53.9 vs 55.0 forecast, 55.4 previously
- Employment 52.6 vs 56.2 previously
- Employment lowest since May

- Market Reaction: helping to stem the losses inspired by this morning's ADP data, though it's only been worth 2bps in terms of 10yr yields so far and 7 ticks for Fannie 4.0s.

"This indicates continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 55.5 percent, which is 4.2 percentage points lower than the 59.7 percent reported in October, reflecting growth for the 52nd consecutive month, but at a slower rate. The New Orders Index decreased slightly by 0.4 percentage point to 56.4 percent, and the Employment Index decreased 3.7 percentage points to 52.5 percent, indicating growth in employment for the 16th consecutive month, but at a slower rate. The Prices Index decreased 3.9 percentage points to 52.2 percent, indicating prices increased at a slower rate in November when compared to October. According to the NMI®, 11 non-manufacturing industries reported growth in November. Respondents' comments for the most part indicate the non-manufacturing sector is maintaining a steady course of incremental growth and a positive outlook for the upcoming months."