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Tuesday - January 31, 2012 12:15PM ET

Current trend Direction: Higher Longer-term, Topping out in short-term

Float/Lock Bias: Short Term Locking - with prices vulnerable to losses

Current Price of FNMA 3.5% Bond: $103.88, +19bp

Stocks are starting the day higher and Mortgage Bonds are a little lower on optimism and progress out of the Eurozone.

European leaders completed the treaty to bring the Euro region into a tighter fiscal union. The agreement will require Euro countries to meet budget rules under national law (European Union). Failure by a member state to meet a fiscal target could lead to penalties and legal action. It is important that a tighter fiscal union be in place as all countries must abide by the same fiscal rules. However - this agreement does not solve the debt problem and how it will be paid back.

The story in Greece is far from from over as Germany pushes for EU regulators to oversee the future budget decisions by Greece. Of course Greece is adamantly against such a notion. We will see how this story plays out. It is clear that Germany is very concerned on Greece's ability and willingness to pay down it's debt - even after the haircut investors are forced to endure. German Chancellor, Angela Merkel, didn't mince words when she said "Greece's debt sustainability is especially bad, you have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap." For the record - "more contributions by private creditors" means more concessions or haircuts. These poor investors originally agreed to a "voluntary" 50% haircut and now it looks like 70% and more. While not officially called a "default" in Greece - the voluntary haircut and debt swap deal is a default by any other name.

If things weren't challenging enough for the Eurozone - the region's unemployment rate hit a Euro record of 10.4%. Within these numbers we see Germany's unemployment rate declining while unemployment is rising in southern European countries. This divergence is a problem and will further put Germany in a defensive position, against more aid for high-deficit countries. We see the tighter fiscal union being tested as the weak economies throughout Europe make it challenging to pay down debt and meet these new deficit rules.

Longer-term the trend remains higher - but in the short-term, the Bond looks vulnerable to more losses. A bias towards locking remains prudent.

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