10yr notes had previously seen some support at 3.52 but just broke higher and currently sit at 3.532. The next major support lies at 3.56. MBS are resisting the sell-off a bit better, down only 6 ticks on the day at 101-08 in FNCL 4.5's. Still, we're down enough that lenders who were out with rates before 10am may be considering a reprice for the worse.

(WSJ) - James Bullard, president of the Federal Reserve Bank of St. Louis, said he would push at the Fed’s upcoming two-day policy meeting (April 26 and April 27) to reduce the central bank’s quantitative easing program by $100 billion, but held out little hope of being successful. Bloomberg News St. Louis Fed President James Bullard “I don’t always get my way on the committee,” he noted in an interview with the Wall Street Journal. Most Fed officials want to carry the program through to its end in June. “Any changes that we’re going to make we’re going to have to make at this meeting,” he added. Mr. Bullard was elaborating on comments he made last week about the Fed’s $600 billion program of U.S. Treasury securities purchases. When the Fed launched the program last November it had lower forecasts for growth and inflation, he said. “We got a stronger economy and we got higher inflation and higher inflation expectations than we expected at the time,” he said. “The logical thing to do is to pull back.”

In the 8 minutes since the stock market opened, the lever has hooked up with strong positive correlation. Stock prices moved moderately higher, bond yields followed, bringing them to their weakest levels of the day. For 10yr notes, that was a test of 3.52 and for MBS, it adds up to a 5 tick loss on the day, bringing FNCL 4.5's to 101-09. While this isn't enough incremental weakness for reprices for the worse, it does point to weaker rate sheets as lenders release this morning.

Treasuries weakened across the yield curve Tuesday as bond investors expressed their nervous sentiments over a few increasingly vocal inflation hawks on the FOMC board. The Fed's overnight lending rate has been at an unprecedentedly low zero to 0.25% range since December 2008. Some members of the FOMC are calling for those rates to rise as its program of quantitative easing is scheduled to conclude this summer. Rising rates would mean that current Treasury coupons are less attractive, which causes a sell-off. Just last night St. Louis Federal Reserve chief James Bullard said that it was unlikely that for the Fed would wait for unemployment to reach normal levels before removing monetary accommodation. The benchmark 10-year Treasury yield gave up six basis points to finish at 3.49% Tuesday. 10s are currently bid 5/32 lower in price at 100-31+ yielding 3.506%. Overnight trading volumes were very low with less than 200,000 futures contracts trading as of 8AM. The 2s/10s yield curve is 2 basis points steeper at 268bps wide. In his morning note AQ called attention to rising inflation expectations with a chart illustrating wider 5-year inflation breakevens between TIPS securities and TSY benchmarks. Trading volume in the TBA MBS market picked up yesterday as day trader's "rinsed and repeated" their tactical yield spread trades and investors prepared for the monthly roll on Monday and the release of the March prepayment report tonight. FNCL 4.5 prices ended the session -10/32 at 101-14. Yield spreads tightened in the morning hours and widened out into the close, ending the two-day period essentially unchanged vs. the curve. Reprices for the worse were reported. The FNCL 4.5 MBS coupon is currently -4/32 at 101-10. AQ has the secondary market current coupon marked at 4.274%. Yield spreads are moving wider vs. benchmarks this morning as MBS cash flows extend into higher rates (higher mortgage rates = slower prepayment speeds = more MBS cash flows = higher yield).