This is a directional alert. Loan pricing will be worse today after bonds reacted negatively to a much better than expected ADP Employment Report at 8:15AM. The Fannie Mae 4.0 MBS coupon is currently -9/32 at 99-27 and the Ginnie Mae 4.0 MBS coupon is -8/32 at 101-20. When taking into consideration after-hours MBS weakness yesterday, rate sheets should shed 15-30bps this morning.

(Reuters) - Bank of America Corp lost its bid to dismiss a lawsuit accusing it of reneging on promises to help borrowers modify their mortgage loans under a much-criticized federal program. The bank, however, claimed a partial victory, citing District Judge Rya Zobel's decision to dismiss claims by borrowers who sought to participate in the two-year-old Home Affordable Modification Program, or HAMP. Zobel nonetheless ruled that homeowners who contend they did not get modifications for which they qualified under HAMP, to avoid foreclosures, could pursue claims against Bank of America. The complaint "meticulously" detailed each of these plaintiffs' compliance with loan modification conditions, but said the bank "willfully failed" to modify the loans, either in bad faith or for its own economic benefit, Zobel wrote. Such allegations are "sufficient" to let the lawsuit go forward, she added. Zobel rejected claims by borrowers who claimed they were "intended beneficiaries" of HAMP but never entered the program, saying they had no contractual right to relief. She also rejected a request to block Bank of America while the lawsuit is pending from foreclosing on 37 borrowers said to be in "imminent danger" of losing their homes. Last week, Bank of America said it would take $20 billion of charges for various mortgage matters, including over its 2008 purchase of Countrywide Financial Corp. Like several rivals, the Charlotte, North Carolina-based bank has also been in talks with state and federal regulators to resolve claims over alleged foreclosure abuses. HAMP was created in 2009 as a centerpiece of efforts by the Obama administration to boost the nation's housing sector. While it provides incentives to loan servicers to encourage modifications, HAMP has been widely derided as ineffective.

(Reuters) - A small team of Treasury officials is discussing options to stave off default if Congress fails to raise the country's borrowing limit by an August 2 deadline, sources familiar with the matter said on Wednesday. Senior officials, including Treasury Secretary Timothy Geithner, have repeatedly said there are no contingency plans if lawmakers do not give the U.S. government the authority to borrow more money. But behind the scenes, top Treasury officials have been exploring ways to prevent a financial meltdown that would be triggered if the government were unable to pay its bills on time, sources told Reuters. Treasury has studied the following issues: - Whether the administration can delay payments to try to manage cash flows after August 2. - If the U.S. Constitution allows President Barack Obama to ignore Congress and the government to continue to issue debt. - Whether a 1985 finding by a government watchdog gives the government legal authority to prioritize payments. The contingency discussions, which have remained a closely guarded secret throughout weeks of negotiations with Congress over the debt ceiling, are being led by Mary Miller, Assistant Secretary for Financial Markets, who is effectively custodian of the country's public debt. Miller's team has debated whether Obama could ignore Congress and order continued borrowing -- by relying on the 14th Amendment of the U.S. Constitution -- if it fails to raise the borrowing cap. The fourth section of the 14th Amendment states the United States' public debt "shall not be questioned." Some argue the clause means the government cannot renege on its debts. Obama dismissed talk of invoking the amendment on Wednesday. "I don't think we should even get to the constitutional issue," he said. "Congress has a responsibility to make sure we pay our bills. We've always paid them in the past."

Fannie Mae 4.0 MBS are down 8 ticks this morning to 99-28 after a stronger-than-expected ADP private payrolls report. 10yr notes have bounced a few times just under 3.17, about 4.5 bps higher than their pre-data yields. Well, we've been here before... Granted, the last time it happened, ADP was released on its normal Wednesday, but the vitals are the same: ADP reports much better than expected, bonds sell off due to the implication on the upcoming Friday NFP, and finally NFP reports close to the original consensus or even weaker. But just because we can observe clear underlying trading motivations this morning, don't take that to mean that we'd shrug them off or that they don't matter. Bottom line is that market have to take a big outlying ADP print seriously on the chance that it's an accurate predictor, and believe it or not, it is surprisingly accurate leading indicator of NFP in a few ways (not always to month-to-month "headline" numbers though...).

Weekly Jobless Claims fell to 418k from an upwardly revised 432k last week. Economists polled by Reuters expected 420k. The 4 week moving average (which many market participants prefer in order to smooth out some of the week-to-week variability of the report) fell to 424.75k from 427.75k. Continued Claims fell slightly 3.681 mln from 3.724 miln last week.

Employment in the U.S. private business sector rose 157,000 from May to June on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. This is well above the Reuters consensus estimate for an increase of 68,000 private payroll jobs and a considerable improvement from the May report (+36,000 jobs). Employment in the service-providing sector rose by 130,000 in June, nearly three times faster than in May, marking 18 consecutive months of employment gains. Employment in the goods-producing sector rose 27,000 in June, more than reversing the decline of 10,000 in May. Manufacturing employment rose 24,000 in June, which has seen growth in seven of the past eight months. These figures are above the consensus forecast for today’s report and for Friday’s jobs number from the BLS. Payroll employment growth at this pace usually implies a steady unemployment rate, perhaps even a modest decline. June’s figures suggest that the economic recovery, which slipped in the spring, might have found new traction in early summer. Employment among large businesses, defined as those with 500 or more workers, increased by 10,000, while employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 59,000. Employment for small businesses, defined as those with fewer than 50 workers, rose 88,000 in June. Employment in the construction industry dropped 4,000 in June, but has been essentially flat since last December. The total decrease in construction employment since its peak in January 2007 is 2,124,000. Employment in the financial services sector decreased 3,000 in June, bringing the total employment decrease for that same period to 686,000.