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Friday - January 27, 2012 2:16 PM ET

Current trend Direction: Sideways to Higher

Float/Lock Bias: Floating

Current Price of FNMA 3.5% Bond: $103.66, +16bp

Mortgage Bonds are trading in an all-time price high range, in response to weaker than expected US economic news.

The Advanced GDP reading - or first of three readings - for the 4th Quarter came in at 2.8%, a bit below expectations of 3.2%. This number will be revised two more times, but if the final GDP remains at 2.8%...then the overall GDP for 2011 would be a scanty 1.57%. That is certainly a "Gross" Domestic Product, when you consider that the government has underwritten more than half of that economic growth with the Payroll Tax benefit.

An end of the week look at the Euronews shows that yields in European Bonds have come down...and by quite a bit. In Italy, the 10-Year Note was well north of 7% not too long ago, but is now beneath 6%. That yield is still high, relative to the US or Germany, where 10-year Note yields are south of 2%...but receding yields have sparked some optimism that Europe's Long-term Refinance Operation (LTRO) has helped alleviate some pressure in the peripheral countries in the Eurozone, like Spain and Italy.

To use a football analogy, the LTRO was really a super punt or "kick of the can" down the road. Yes, in the short run it alleviated some pressure...but it doesn't really get to the root of the problems. Europe needs to play a serious offensive line, by creating a tighter fiscal union, implementing austerity measures, and developing growth strategies to help pay down the enormous debt.

Bonds are up as volatility reigns supreme. Float, but stay close to the Lock trigger. If the Bond moves much lower from current levels we will quickly chage our bias from Flaot to Lock.

To quote an airline pilot: " it's far better to be on the ground and wish you were flying, than to be in the air wishing you were on the ground"...it's far better to be locked at a great rate but perhaps wish you were floating, than to be floating and wish you'd locked in that great rate."

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