On average, loan pricing is 28.2bps better than it was last Thursday. We did not update our model on Friday. Improvements are pretty consistent across the note rate spectrum. BestEx on C30 paper is still 4.875%. The permanent buydown from 4.875% to 4.75% costs on average 90.9bps. This is very expensive!

Note the differences between the 4.0 and 4.5 FNCL charts. That spike up and down in the 4.5 chart illustrates the lack of liquidity (and volume) currently plaguing our desire for excitement today. Things are STILL totally sideways and quiet. Nothing to report...

In the past 30 minutes, 10yr treasuries and FNCL 4.0's actually have not lost any ground, but despite this, 4.5 MBS are down a tick at 102-14. No cause for reprice concern at all, but again, if 4.5's were to fall further from these levels, that risk could increase. Hopefully, however, the strength in 4.5's and 10's is merely a prelude to a 4.5 FNCL bounce.

Though we saw more volatility in benchmarks this AM than MBS, the net effect was a range-bound and sideways morning until the Fed finished their pass in the 7-10 year range. This gave a big boost to treasuries and a moderate one to MBS. Since then, both have been sideways once again, FNCL 4.5's in a similarly tight range of only a few ticks. Certainly not the kind of price movements that cause reprices for the worse, but that risk could develop if we break back into or below that weaker AM range.

The agreement reduces the uncertainty regarding BofA's exposure to GSE mortgage representation and warranty liability. However, the recent court decision allowing MBIA, a monoline insurer, to use statistical sampling in making its case for representation and warranty claims on securitization deals it insured for BofA tempers the positive aspects of the settlement. The GSE exposure of the representation and warranty issue is, in our view, significantly larger than the estimated potential monoline exposure.

10yr notes have been grinding up into 3.346 over the past hour, which has corresponded to 4.5's trying to hold above 102-15, so far successfully. But the series of higher lows in 10yr yields leading up from their best level of the day at 3.32 (or lower highs in MBS coming down from 102-17) suggest the recent narrow ranges are ready to break.

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With the recent move higher in production MBS, medium term charts now give the distinct impression of a 102-10 pivot point in 4.5 FNCL's. In general, we try to focus on the more technically reliable securities such a treasuries and futures, but this 101-10 band of prices has been relevant recently. Look for weakness to test prices back down as low as this though there is some shorter term support from 101-15.

We saw fast money bond traders booking a profit on their post 7-year note auction longs when 10s crossed through 3.33% resistance (after short covering at 3.40%). This once again reminds us that investing motivations are short term and 10 year yields are not likely to move far passed 3.27% without a substantial push back until the December Employment Report is released on Friday.

It will be interesting to see how long 4.5's can hold out doing absolutely nothing this AM! 10yr treasuries are hurtling lower in yield at the moment, now at 3.3440 after being as high as 3.42 earlier today. MBS 4.0's, have moved higher in response, now at 99-09, and while 4.5's have added a tick to 102-14, their action is largely sideways still, whereas 4.0's are moving directionally.

10yr yields fell all the way to AM lows at 3.36, but have since ticked just slightly higher. So 3.36 to 3.42 marks the range in 10yr Treasuries this morning. Those 6 bps in yields would normally coincide with a significantly wider range than the THREE TICKS (!) we've seen in 4.5's (102-10 to 102-13). Granted, there is a bit more movement down in coupon, but not much seems to be inspiring 4.5's to much of anything. Low volume phenomenon, and we can continue to watch the outer limits of the treasury range for potential early indication.

After yields in the 10yr benchmark moved up through their weakest levels of the morning, the last line of defense from a technical standpoint, was just under 3.42. Following 10am Econ data, 3.42 provided a good support bounce and 10's have moved back into the 3.38's currently. MBS have firmed up a bit as a result, with 4.0's at 99-03 and 4.5's at 102-12. The volume that does exist has greatly favored treasuries so far this AM, so expect MBS price action to continue to be sparse by comparison.

Total: 810bil vs previous 802bil. Private Non-Residential - $256bil versus $252bil previous. Private residential - $235bil vs $229bil Previous. Public Spending - $318bil vs $320bil previous. To see how these numbers compare to previous month, and for a chart of their ongoing changes, visit: http://www.mortgagenewsdaily.com/data/housing-construction-spending.aspx

Today 07:00 - US NOV CONSTRUCTION SPENDING +0.4 PCT (CONSENSUS +0.2 PCT) TO $810.2 BLN VS OCT +0.7 PCT (PREV +0.7 PCT) Today 07:00 - US NOV PRIVATE CONSTRUCTION SPENDING +0.3 PCT, PUBLIC SPENDING +0.7 PCT Today 07:00 - US NOV CONSTRUCTION SPENDING LEVEL HIGHEST SINCE JUNE ($820.2 BLN)

Today 07:00 - ISM U.S. MANUFACTURING PRICES PAID INDEX 72.5 IN DECEMBER (CONSENSUS 70.4) VS 69.5 IN NOV Today 07:00 - ISM REPORT ON U.S. MANUFACTURING SHOWS PMI AT 57.0 IN DECEMBER (CONSENSUS 57.0) VS 56.6 IN NOV Today 07:01 - ISM U.S. MANUFACTURING EMPLOYMENT INDEX 55.7 IN DECEMBER VS 57.5 IN NOVEMBER Today 07:01 - ISM U.S. MANUFACTURING NEW ORDERS INDEX 60.9 IN DECEMBER VS 56.6 IN NOVEMBER Today 07:02 - ISM U.S. MANUFACTURING ACTIVITY INDEX AND PRICES PAID INDEX AT HIGHEST SINCE MAY 2010 Today 07:03 - ISM U.S. MANUFACTURING EMPLOYMENT INDEX AT LOWEST SINCE MARCH 2010

Before we begin any dialogue on movements in the bond market today, the "LOW VOLUME" caveat should be assumed to be in place. With that said, the price action that does exist, while not necessarily relevant, has weakened. 10's are now approaching 3.42, and MBS are either AT or just slightly below their lows of the morning. If there are any lenders out there who already priced, or have otherwise shown a previous tendency to reprice this early in the morning, we've just seen our early warning sign. There's a bit more support yet to come, and nothing here speaks to any developing trend. Just some morning choppiness.

Both MBS and Treasuries are remaining better than the weakest levels of the morning. For 10's that's just at the 3.40 mark, and for MBS, around 99-02 in 4.0's and 102-10 in 4.5's. Volume has been quite low this morning as several key participants remain on Holiday, but we do get ISM data as well as construction spending coming up in about half an hour which may draw out some domestic volume. Otherwise, it will continue to be one of those "watching and waiting" sorts of days.

There was a distinct showing of support on the 30th (last day with respectable volume in the treasury market) for price levels that futures reached immediately following the 7yr note auction. Those prices drifted higher on Friday and are now merely returning to that band of thicker volume marks. Nothing going on here to get panicked about.

China, Japan, and the United Kingdom are closed today to celebrate the New Year. Treasury trading flows were light again overnight as a result.