• Q2 GDP +4.0 vs +3.0 forecast
• Q1 revised to -2.1 from -2.9
• Consumer Spending +2.5 vs +1.2 previously
• Business Inventory Change +$93.4 bln, adds 1.66% to GDP, biggest contribution since Q4 2011

Naturally, bond markets are much weaker on the strong data.  10yr yields rose a quick 4bps to 2.50+ and MBS fell 8 ticks to 102-08 (Fannie 3.5s).  For now, however, that's as far as the selling has gotten, and there's a fighting chance that we bounce here.  Time will tell.  

4.0 vs 3.0 may seem like a big beat, but to reiterate something in this morning's Day Ahead, that 3.0 was potentially artificially lower than it otherwise would have been.  Here's the relevant part:

"This is a classic case study in market psychology!  Human psychology even!  You've perhaps heard of "the bump" when it comes to sales negotiations.  This is no different.  The ridiculously low print for Q1 has market participants broadly convinced that today will be worse than they otherwise would predict."

In fact, the range of forecasts went as high as 5.2%!  4.0 may well have been closer to objective reality, had forecasters not been so scarred by the -2.9 in Q1 (now revised to -2.1).

While the selling pressure is minimal so far, it sets us up for a bit of an uphill battle over the next 2 days.  The burden of proof now falls to the bond bulls, and we'd need a friendly FOMC Statement this afternoon (that would be one that doesn't say anything new, basically), and a 'miss' on Friday's payrolls numbers.

The overnight session was largely uneventful as European bond markets essentially took the day off from volatility.  Instead, German Bunds moved gently higher from the technical resistance created by yesterday's all time low yields.

Treasuries moved higher at a slightly quicker pace, possibly with some anxiety over today's heavy economic calendar.  The first relief of the day was in with ADP Employment missing to the tune of 218k vs 230k forecast.  By the time you read this, GDP will be out, and we'll be on to the next move.

The day's only significant econ data--Consumer Confidence--was much stronger than expected.  It took bond markets a few minutes to commit to a reaction, but when the did, it was understandably weaker.  The major caveat to the weakness is that US bond markets are also taking cues from European trading and domestic equities in addition to the Confidence numbers.  In general, it seems like EU trading is keeping a lid on US bond market weakness.

Fannie 3.5s are down to 102-14 from 102-18 highs earlier this morning and 10yr yields moved up from 2.46 to 2.476 after the data.  As of now, we're still seeing both MBS and Treasuries poke and prod at slightly weaker levels.  In other words, there's no discernible "bounce" yet (but we may be working on one now, hopefully).  If we continue losing ground at this pace, negative reprices could become possible shortly.

Here's the run-down on the Confidence data:

• July Consumer Confidence 90.9 vs 85.3 forecast
• June revised to 86.4 from 85.2
• Present Situation 88.3 vs 86.3 last month
• Expectations Index 92.7 vs 86.4 previously
• "jobs-hard-to-get" 30.7 vs 30.7 previously
• overall confidence headline is highest since Oct 2007

If there's a kind of storm that's not quite perfect, but still pretty darn good, this morning's confluence of events is getting there.  Here are the ingredients

1. European debt rally (a big one).  German Bunds moved into new all-time lows overnight and went on another push lower as the US session began.  This coincided with #2.

2. Month-End buying.  With certain investors needing to buy a certain amount of Treasuries/MBS before the end of the month and with prices moving quickly higher this morning, we're seeing what can only be some month-end buying.  For more on that, read this: 'Month-End Buying,' And Its Effect on Bond Markets.
 
3. Short-Covering.  Short covering happens when traders who were betting on rates moving higher, are forced to buy bonds as yields move lower in order to prevent further losses.  So with #1 and #2 making for an extra push toward lower yields, short-covering merely acts as an accelerant.

If one of these three things is doing the most to motivate the US bond market rally, it's the European debt rally.  By that same rationale, when it changes course, that's when our rally this morning stands the greatest chance of bouncing or leveling off.  Ultimately, we're not breaking into any new ground today with respect to the recently low/narrow rate range.

In the hour and a half since the strong 5yr Treasury auction, bond markets have done a good job of bouncing back and holding gains.  The initial improvement was fairly quick, and leveled off within the first 30 minutes--forming a narrow little consolidative range.

Only in the past few minutes have MBS and Treasuries moved out of that range and into stronger territory.  We had a few non-sequitur negative reprices even after the bounce back, but that seems less likely now.  If anything, positive reprices are more likely.

Fannie 3.5s are currently up 5 ticks at 102-16 and 10yr yields are down 2.9bps at 2.462.