Given the hullabaloo caused by yesterday's Hilsenrath article, Treasuries kicked off the overnight session trading almost perfectly flat until European hours. The same was true for equities futures (though those remained perfectly flat all night (ok, so 3 points range in S&P).
This isn't much of a surprise considering the thrust of the article was to edify that which is already known: the Fed isn't raising short term borrowing rates any time soon. This was perhaps the biggest "no duh" of any headline that 's ever caused a lightning quick 4bp rally in Treasuries, or at least that would have been a safe assumption considering the fact that tapering has nothing to do with the Fed Funds Rate, the latter being tied to thresholds mentioned in the policy text and not seen changing until 2014 or 2015 according to Fed forecasts.
But if you click through the various Treasury charts on the dashboard, you'll see that shorter maturities clearly had the more pronounced reaction to the story, indicating that markets actually didn't simply mistake the headline for a comment on tapering prospects (again, tapering ≠ rate hikes). Further evidence that tapering wasn't inferred came courtesy of Yen trading levels which kept on truckin' higher (weaker) yesterday afternoon and didn't trade stronger until Asian markets opened--even then never moving past levels seen before the Hilsenrath article.
So the reaction in Treasuries remains a bit confusing. More appropriately, it's downright alarming that it had any effect on Fed Funds Rate expectations (which have been under no threat, relative to asset purchases)--tacitly suggesting markets are having a hard time distinguishing the two decidedly discreet components of "accommodative policy." There's low rate accommodation and asset purchase accommodation. One of these things is not like the other, but apparently that's news to market participants, and that has scary implications for volatility.
Value judgments are moot, however. Treasuries may have traded sideways during Asian hours, but stocks are in line with pre-Hilsenrath levels. Markets have spoken, and that correlation along with Japan's reaction tells us the "low rates" issue was actually an issue. 10yr yields improved as money flowed into both sides of the market in European hours, before flattening out heading into domestic hours.
That's afforded and MBS open just a few ticks higher than yesterday's close, and a measured rally higher since then. Fannie 3.5s are up 9 ticks at 103-22 now--their best levels of the week. 10's are at their lows of the week as well, down 2.7 bps at 2.124. Equities are consolidating a choppy narrow range just under yesterday's closing levels, and we find ourselves waiting for Consumer Sentiment data as the ostensible gateway drug to a more hardcore retracement in bond markets (previous range centers on 2.10 in 10's and has resistance at 2.07). We'd need an awesomely bad sentiment reading for such things though.