Mortgage Bonds are starting the day and January where they left off - in volatile fashion.

Prices are sharply lower as Stocks open the day stronger. News that China's manufacturing slowed from it's torrid pace is giving Stocks around the world a boost as it appears that the recent rate hikes and tightened lending standards may already be having an effect on cooling down the economy and inflation. Global Stock investors have been concerned that China's economy may have been overheating and that inflation would put a damper on global growth. With today's report, and again it is just one report, there is a sense that the Chinese economy may just be slowing down to a more moderate growth pace, with inflation cooling. With Traders back at their desks, today's sell-off in Bonds is coming with some more conviction than the exaggerated price moves we saw last week, when trading volume was thin.

The last 60 days have been very volatile for Mortgage Bonds, and at times it may seem very hard to get a sense of where rates are headed in 2011 - especially with all the noise and confusion in the media. But one line we can always revert back to is "don't fight the Fed". Stocks finished 2010 strong, with the S&P 500 gaining 13%, thanks to QE2 and it appears they are starting 2011 where it left off. With all the economic stimulus hitting the economy, there is a sense that economic growth may pick up more than previously expected. And this growth, over time, will lead to gradually higher rates. Will mortgage rates move dramatically higher in the near term? We think not, but at the same time rate probably won't get that much better either and any improvement may be short lived.

On Friday - we will get the Jobs Report and this one may have a big impact on all themarkets. Expectations are for 135,000 jobs to be created in December. If this reportcomes in beneath expectations, Stocks could take a breather from their rise and allow forsome bond pricing improvement. But should the number beat expectations, it is very toughto see Bonds making any meaningful improvement as continued signs of US economicgrowth will weigh on prices.

DOUBLE DIGITS - The S&P 500 gained +15.1% (total return result including the impact of reinvested dividends) in calendar year 2010. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).

THE LONG-TERM AVERAGE - The S&P 500 has gained an average of +9.7% per year (total return) over the last 50 years (i.e., the years 1961-2010). No single calendar year actually gained +9.7% in the last half century. The closest that any year came to the +9.7% average was in 1993 when the stock index gained +10.1% (source: BTN Research).

+1,000% GAIN - Over the last 312 months (26 years) through 12/31/10, the S&P 500 is up +1,086% (total return), or an annualized +10.0% per year (source: BTN Research).