We finally got a bounce that has materialized into something meaningful. The lows look like they starged coming in as early as 11:30, but were dragged lower still at 12:11pm. At that point, the cries of "come get me down here sellers!" from the bid side dried up and value buying at the wides kicked in. In other words, spreads blew out so much that the "limit" was reached for the day, and should continue to hold as long as Treasuries hold their range.

Negative reprice risk now ebbs for the quick-acting lenders and those who already repriced. There could still be some laggards yet to come with a negative reprices, but the bounce is such that we wouldn't rule out a corrective positive reprice as well. Either way, bleeding stopped for now. Fannie 3.0s at 101-20 after hitting 101-13 lows. The floor is somewhere between 101-14 and 101-16 though, and the absolute lows of the day stand out as more isolated "overrun." 10's are up to 2.013 and we'd be a bit concerned if they run above 2.03. Otherwise, this might be the last update until Tuesday morning! Let's hope that it is. (hide)

The pocket translator for trade-speak might characterize this morning as "fading the Durables print," where "fade" means to take up a counterintuitive position to that suggested by data or events among other things. That is to say, the data was stronger than expected, which traditionally implies negative price pressure on bond markets, and we're instead seeing a rally.

It's not just bond markets though. Equities are making the equivalent move with S&P futures off about 8 points from their post-data highs. For their part, MBS opened a few ticks into positive territory, weakened briefly on the initial data print and bounced in the other direction with everyone else, now 5 ticks higher on the day at 101-27.

Whether or not the positive momentum is sustainable into the early 2pm close remains to be seen, but simply holding ground above 101-16 is all we'd really need to keep hope alive for a bigger-picture supportive bounce next week.

From a tactical standpoint, the high 1.99's and low 2.00's in 10yr yields have been a key battleground over the past two days, coming into play as an ultra high volume pivot point yesterday and serving as a tough resistance floor to an overnight rally. At 1.998 moments ago, we were at the best levels of the night, but the biggest bounce yesterday was all the way down at 1.988 (feels like a very long distance for a single basis point).

There's no additional scheduled data today, and again, we close early for a 3-day weekend. Japan will be trading on Monday whereas we will not, and this could add some relative defensiveness into any intention to rally meaningfully past the aforementioned inflection point at 1.988. We'll cross that bridge (or not) when we come to it though, and for now, 10's have already shied away, back to 2.007 currently.

On a final note, it is a "quadruple witching" session, meaning that all open positions in single stock and stock index futures and options will have to be closed or rolled. This can be nothing more than a silly phrase to impress your friends over the holiday weekend ("sorry I'm late to the cookout guys/gals... You know how it is, what with Quadruple Witching and all...") or it can be cause of inexplicably motivated volatility. So far so good on that note, but things probably won't die down meaningfully until lunch time in New York, which tends to be like the Bermuda triangle on early close Friday's ahead of 3 day weekends. (hide)

- Headline +3.3 vs +1.5 forecast, -5.9 previously
- Ex Transportation +1.3 vs +0.5 forecast
- Nondefense orders, excluding aircraft +1.2 vs +0.5 forecast

Market Reaction: So far so good with bond markets bouncing back after an initial obligatory blip to the downside. Back in line with 8:30am levels now.

New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent.

Transportation equipment, also up two of the last three months, led the increase, $5.1 billion or 8.1 percent to $67.6 billion. This was led by nondefense aircraft and parts, which increased $1.9 billion. (hide)

Highlights:
- Net Purchases $15.3 bln vs $15.1 bln previously
- Allocations roughly similar with some 'up-in-coupon' exceptions.
- Fannie 2.5's dropped to $100 mil from $350 mil previously
- Fannie 3.5's rose to $700 mil from $450 mil previously
- Other than those 2.5's and 3.5s, everything else in 30yr Fixed GSEs was 3.0s (total of $8.85 bln) Full breakdown and link to archives (hide)

Fannie 3.0s are only 3+ ticks in the red now compared to 7 ticks earlier today (101-19 vs 101-15). Simply holding sideways just under these unchanged levels has been enough for a few lenders to come out with positive reprices, but it's important to note that those reprices aren't indicative of a bullish shift in today's trend.

On the bright side, the ground-holding is now the longest-standing instance of "flat-to-improving" prices we've had over the past two sessions, and for that, we're thankful. Other lenders may express their thanks the longer it continues to hold.

10's are still about a bp in the green at 2.0298 but have seen 2 decent supportive bounces at and just under 2.05. We're not putting this out as a positive reprice alert, however, because we're not especially confident that the uptrend continues, and to a lesser extent because other lenders may have yet to negatively reprice (though they'd be very late). We're still not out of the woods. (hide)

(Check out the charts in the Agenda HERE. The NY Fed is forecasting 3.5% growth in 2014. Plenty of other interesting charts as well.)

As we did last year around this time, we’re presenting the New York Fed staff outlook for the U.S. economy to the Bank’s Economic Advisory Panel at today’s meeting. It provides an opportunity to get valuable feedback from leading economists in academia and the private sector on the staff forecast; such feedback helps us evaluate the assumptions and reasoning underlying our forecast and the risks to it. It’s important to open the staff forecast to periodic evaluation to inform the staff’s discussions with New York Fed President Bill Dudley about economic conditions. In the same spirit of inviting feedback, we’re sharing a short summary of our forecast; for more, see the material from the Panel’s meeting.

The forecast anticipates moderate economic expansion over the next two years. Real GDP growth in 2013 is expected to be around 2½ percent, slightly below the rate in 2013:Q1 as well as below our year-ago projection of about 3 percent. A major factor behind the projected sluggishness over the rest of this year is fiscal policy. The combination of sequestration and the tax increases associated with the agreement to avert the “fiscal cliff” is anticipated to exert a significant drag on GDP growth of more than 1 percentage point. In 2014, the fiscal drag is expected to be smaller than in 2013. With a smaller fiscal drag, an expected further lessening of other headwinds—for example, the European sovereign debt crisis and the deleveraging of household balance sheets—and further improvement in labor market and financial conditions, we project real growth in 2014 of around 3¼ percent.

(hide)

- Annual Rate 454k vs 425k consensus
- +2.3 pct vs March +3.5 pct
- Median Price a record $271,600, +14.9% Year over Year
- Inventory at 156k, highest since Oct 2011

Sales of new single-family houses in April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent (±12.8%)* above the revised March rate of 444,000 and is 29.0 percent (±20.7%) above the April 2012 estimate of 352,000.

The median sales price of new houses sold in April 2013 was $271,600; the average sales price was $330,800. The seasonally adjusted estimate of new houses for sale at the end of April was 156,000. This represents a supply of 4.1 months at the current sales rate. (hide)

10yr Treasuries started the overnight session popping higher in yield into the 2.06's as the Yen and JGBs (Japanese Government Bonds) sold off. That changed at about 9:40pm after Chinese PMI unexpectedly turned contractionary. JGB yields began to fall in earnest at 11:40pm but US TSYs stayed more connected to USD/JPY (dollar/yen), which fell from over 103 to under 101 by 5am, ushering in a 7%+ decline in the Nikkei and triggering a temporary shut-down of equities futures.

Treasuries rallied all the way to 1.965 by 4:30am and have been grinding higher since then, popping slightly higher after this morning's Jobless Claims data to 2.033. Data shook up MBS as well, which had already opened in the red, and significantly underperforming Treasuries. We managed to get a friendly post-data bounce after initial weakness and 10's are now back under 2.0 while Fannie 3.0s are up 4 ticks to 101-26.

The only remaining scheduled data this morning is New Home Sales at 10am. For the 11 ticks that Treasuries are in the green, MBS being up only 4 ticks is some of the better relative performance of the morning. MBS should be able to close some of that gap the more we hold 2% as a ceiling in 10s, or fingers crossed, improve upon it. (hide)

- Claims 340k vs 345k Consensus, 363k Previous
- 4-wk average 339.5k vs 340k previously
- Continued Claims 2.912 mln vs 3.0 mln f'cast
- Cont'd claims lowest since March 2008

- Market Reaction: down several ticks in MBS and up 1.5 bps in 10s

In the week ending May 18, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 23,000 from the previous week's revised figure of 363,000. The 4-week moving average was 339,500, a decrease of 500 from the previous week's revised average of 340,000.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending May 11, unchanged from the prior week's revised rate. The advance number for seasonally adjusted insured unemployment during the week ending May 11 was 2,912,000, a decrease of 112,000 from the preceding week's revised level of 3,024,000. The 4-week moving average was 2,995,250, a decrease of 23,750 from the preceding week's revised average of 3,019,000. (hide)

Seems to be a popular question today:

When's the last time we've lost this much ground in MBS?

Plenty of sessions have come close to the 1 point loss in the predominant production coupon, but based on some cursory research this afternoon, the nearest neighbor is December 15th, 2010, when Fannie 4.5's moved from 101-16 to 100-15.

Of additional interest is the fact that May is is also the worst month since that same December with 2.3125 points lost so far. But in terms of liquid production coupons, you'd have to go back to the nearly 3 point loss in 12/2009. So yeah... It's pretty bad. (hide)

As feared/hoped/surmised, the Minutes from the most recent FOMC meeting didn't include any meaningful surprises that hadn't already been conveyed by Bernanke earlier this morning or in other Fed speeches over the past two weeks. While we're not sure the Fed has really done anything to "map out" a tapering plan, per se (as suggested in the May 10th Hilsenrath article), they have more or less copped to tapering being on the table.

Mapping aside, the notion that the Fed was "closer to tapering" than markets may have previously anticipated is one of the key bearish themes for bond markets over the past two weeks. An absence of tapering verbiage in today's minutes would almost certainly have reversed much of those losses, but that was effectively ruled out when Bernanke himself discussed tapering being possible some time in the upcoming 3 meetings. The only way a Fed member could have done any more to prepare markets for today would have been to say "The minutes on May 22nd will reference that some of us thing we should taper soon."

Net/net, the Minutes were about as balanced as one would expect given the recent communications, but if we rewind to late April, the current tenor would seem downright precipitous. In that regard, the first 3 weeks in May have done an extraordinary job of getting expectations in the right place, but unfortunately that's still a bad place for MBS and Treasuries. It's a place where we understand that the Fed is going to keep buying long-term assets, but one in which there's clearly a drive to reduce the overall amount of those purchases in order to mitigate system shocks in the future.

In other words, they don't want QE to end like it began--with an abrupt change to the balance sheet of many hundreds of billions of dollars. Instead, it seems clear the Fed wants to ease us into things this time around. Metaphorically, "adding QE" is like an ER visit whereas "removing QE" is like weeks and months of physical therapy.

Bottom line, even though the "hype" isn't this massively negative realization for bond markets, it is still very real, and precludes a triumphant directional bounce back for bond markets. On the bright side, we've gone no lower since the Minutes release, but neither have we really done much at all. Without fear of exaggeration, today was all about Bernanke this morning. The biggest movement in prices and volumes was seen then, and it was left to Minutes to either confirm or surprise. They didn't surprise and here we are hovering just under 102-00 in Fannie 3.0s and just over 2.0 in 10yr yields.

Negative reprice risk still lingers for some lenders, but shifts positively for most as long as we continue to hold near 102-00. Keep in mind that a positive shift for most means that we get back to neutral, with only one or two aggressive types standing much of a chance of a corrective positive reprice at this point. Prices have been trending lower since 2:16pm, so we wouldn't get our hopes up for anything yet, and would stay very guarded about negative risk if you haven't seen a negative reprice in a few hours. (hide)

We finally got a bounce that has materialized into something meaningful. The lows look like they starged coming in as early as 11:30, but were dragged lower still at 12:11pm. At that point, the cries of "come get me down here sellers!" from the bid side dried up and value buying at the wides kicked in. In other words, spreads blew out so much that the "limit" was reached for the day, and should continue to hold as long as Treasuries hold their range.

Negative reprice risk now ebbs for the quick-acting lenders and those who already repriced. There could still be some laggards yet to come with a negative reprices, but the bounce is such that we wouldn't rule out a corrective positive reprice as well. Either way, bleeding stopped for now. Fannie 3.0s at 101-20 after hitting 101-13 lows. The floor is somewhere between 101-14 and 101-16 though, and the absolute lows of the day stand out as more isolated "overrun." 10's are up to 2.013 and we'd be a bit concerned if they run above 2.03. Otherwise, this might be the last update until Tuesday morning! Let's hope that it is. (hide)

The pocket translator for trade-speak might characterize this morning as "fading the Durables print," where "fade" means to take up a counterintuitive position to that suggested by data or events among other things. That is to say, the data was stronger than expected, which traditionally implies negative price pressure on bond markets, and we're instead seeing a rally.

It's not just bond markets though. Equities are making the equivalent move with S&P futures off about 8 points from their post-data highs. For their part, MBS opened a few ticks into positive territory, weakened briefly on the initial data print and bounced in the other direction with everyone else, now 5 ticks higher on the day at 101-27.

Whether or not the positive momentum is sustainable into the early 2pm close remains to be seen, but simply holding ground above 101-16 is all we'd really need to keep hope alive for a bigger-picture supportive bounce next week.

From a tactical standpoint, the high 1.99's and low 2.00's in 10yr yields have been a key battleground over the past two days, coming into play as an ultra high volume pivot point yesterday and serving as a tough resistance floor to an overnight rally. At 1.998 moments ago, we were at the best levels of the night, but the biggest bounce yesterday was all the way down at 1.988 (feels like a very long distance for a single basis point).

There's no additional scheduled data today, and again, we close early for a 3-day weekend. Japan will be trading on Monday whereas we will not, and this could add some relative defensiveness into any intention to rally meaningfully past the aforementioned inflection point at 1.988. We'll cross that bridge (or not) when we come to it though, and for now, 10's have already shied away, back to 2.007 currently.

On a final note, it is a "quadruple witching" session, meaning that all open positions in single stock and stock index futures and options will have to be closed or rolled. This can be nothing more than a silly phrase to impress your friends over the holiday weekend ("sorry I'm late to the cookout guys/gals... You know how it is, what with Quadruple Witching and all...") or it can be cause of inexplicably motivated volatility. So far so good on that note, but things probably won't die down meaningfully until lunch time in New York, which tends to be like the Bermuda triangle on early close Friday's ahead of 3 day weekends. (hide)

- Headline +3.3 vs +1.5 forecast, -5.9 previously
- Ex Transportation +1.3 vs +0.5 forecast
- Nondefense orders, excluding aircraft +1.2 vs +0.5 forecast

Market Reaction: So far so good with bond markets bouncing back after an initial obligatory blip to the downside. Back in line with 8:30am levels now.

New orders for manufactured durable goods in April increased $7.2 billion or 3.3 percent to $222.6 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 5.9 percent March decrease. Excluding transportation, new orders increased 1.3 percent. Excluding defense, new orders increased 2.1 percent.

Transportation equipment, also up two of the last three months, led the increase, $5.1 billion or 8.1 percent to $67.6 billion. This was led by nondefense aircraft and parts, which increased $1.9 billion. (hide)

Highlights:
- Net Purchases $15.3 bln vs $15.1 bln previously
- Allocations roughly similar with some 'up-in-coupon' exceptions.
- Fannie 2.5's dropped to $100 mil from $350 mil previously
- Fannie 3.5's rose to $700 mil from $450 mil previously
- Other than those 2.5's and 3.5s, everything else in 30yr Fixed GSEs was 3.0s (total of $8.85 bln) Full breakdown and link to archives (hide)

Fannie 3.0s are only 3+ ticks in the red now compared to 7 ticks earlier today (101-19 vs 101-15). Simply holding sideways just under these unchanged levels has been enough for a few lenders to come out with positive reprices, but it's important to note that those reprices aren't indicative of a bullish shift in today's trend.

On the bright side, the ground-holding is now the longest-standing instance of "flat-to-improving" prices we've had over the past two sessions, and for that, we're thankful. Other lenders may express their thanks the longer it continues to hold.

10's are still about a bp in the green at 2.0298 but have seen 2 decent supportive bounces at and just under 2.05. We're not putting this out as a positive reprice alert, however, because we're not especially confident that the uptrend continues, and to a lesser extent because other lenders may have yet to negatively reprice (though they'd be very late). We're still not out of the woods. (hide)

(Check out the charts in the Agenda HERE. The NY Fed is forecasting 3.5% growth in 2014. Plenty of other interesting charts as well.)

As we did last year around this time, we’re presenting the New York Fed staff outlook for the U.S. economy to the Bank’s Economic Advisory Panel at today’s meeting. It provides an opportunity to get valuable feedback from leading economists in academia and the private sector on the staff forecast; such feedback helps us evaluate the assumptions and reasoning underlying our forecast and the risks to it. It’s important to open the staff forecast to periodic evaluation to inform the staff’s discussions with New York Fed President Bill Dudley about economic conditions. In the same spirit of inviting feedback, we’re sharing a short summary of our forecast; for more, see the material from the Panel’s meeting.

The forecast anticipates moderate economic expansion over the next two years. Real GDP growth in 2013 is expected to be around 2½ percent, slightly below the rate in 2013:Q1 as well as below our year-ago projection of about 3 percent. A major factor behind the projected sluggishness over the rest of this year is fiscal policy. The combination of sequestration and the tax increases associated with the agreement to avert the “fiscal cliff” is anticipated to exert a significant drag on GDP growth of more than 1 percentage point. In 2014, the fiscal drag is expected to be smaller than in 2013. With a smaller fiscal drag, an expected further lessening of other headwinds—for example, the European sovereign debt crisis and the deleveraging of household balance sheets—and further improvement in labor market and financial conditions, we project real growth in 2014 of around 3¼ percent.

(hide)

- Annual Rate 454k vs 425k consensus
- +2.3 pct vs March +3.5 pct
- Median Price a record $271,600, +14.9% Year over Year
- Inventory at 156k, highest since Oct 2011

Sales of new single-family houses in April 2013 were at a seasonally adjusted annual rate of 454,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.3 percent (±12.8%)* above the revised March rate of 444,000 and is 29.0 percent (±20.7%) above the April 2012 estimate of 352,000.

The median sales price of new houses sold in April 2013 was $271,600; the average sales price was $330,800. The seasonally adjusted estimate of new houses for sale at the end of April was 156,000. This represents a supply of 4.1 months at the current sales rate. (hide)

10yr Treasuries started the overnight session popping higher in yield into the 2.06's as the Yen and JGBs (Japanese Government Bonds) sold off. That changed at about 9:40pm after Chinese PMI unexpectedly turned contractionary. JGB yields began to fall in earnest at 11:40pm but US TSYs stayed more connected to USD/JPY (dollar/yen), which fell from over 103 to under 101 by 5am, ushering in a 7%+ decline in the Nikkei and triggering a temporary shut-down of equities futures.

Treasuries rallied all the way to 1.965 by 4:30am and have been grinding higher since then, popping slightly higher after this morning's Jobless Claims data to 2.033. Data shook up MBS as well, which had already opened in the red, and significantly underperforming Treasuries. We managed to get a friendly post-data bounce after initial weakness and 10's are now back under 2.0 while Fannie 3.0s are up 4 ticks to 101-26.

The only remaining scheduled data this morning is New Home Sales at 10am. For the 11 ticks that Treasuries are in the green, MBS being up only 4 ticks is some of the better relative performance of the morning. MBS should be able to close some of that gap the more we hold 2% as a ceiling in 10s, or fingers crossed, improve upon it. (hide)

- Claims 340k vs 345k Consensus, 363k Previous
- 4-wk average 339.5k vs 340k previously
- Continued Claims 2.912 mln vs 3.0 mln f'cast
- Cont'd claims lowest since March 2008

- Market Reaction: down several ticks in MBS and up 1.5 bps in 10s

In the week ending May 18, the advance figure for seasonally adjusted initial claims was 340,000, a decrease of 23,000 from the previous week's revised figure of 363,000. The 4-week moving average was 339,500, a decrease of 500 from the previous week's revised average of 340,000.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending May 11, unchanged from the prior week's revised rate. The advance number for seasonally adjusted insured unemployment during the week ending May 11 was 2,912,000, a decrease of 112,000 from the preceding week's revised level of 3,024,000. The 4-week moving average was 2,995,250, a decrease of 23,750 from the preceding week's revised average of 3,019,000. (hide)

Seems to be a popular question today:

When's the last time we've lost this much ground in MBS?

Plenty of sessions have come close to the 1 point loss in the predominant production coupon, but based on some cursory research this afternoon, the nearest neighbor is December 15th, 2010, when Fannie 4.5's moved from 101-16 to 100-15.

Of additional interest is the fact that May is is also the worst month since that same December with 2.3125 points lost so far. But in terms of liquid production coupons, you'd have to go back to the nearly 3 point loss in 12/2009. So yeah... It's pretty bad. (hide)

As feared/hoped/surmised, the Minutes from the most recent FOMC meeting didn't include any meaningful surprises that hadn't already been conveyed by Bernanke earlier this morning or in other Fed speeches over the past two weeks. While we're not sure the Fed has really done anything to "map out" a tapering plan, per se (as suggested in the May 10th Hilsenrath article), they have more or less copped to tapering being on the table.

Mapping aside, the notion that the Fed was "closer to tapering" than markets may have previously anticipated is one of the key bearish themes for bond markets over the past two weeks. An absence of tapering verbiage in today's minutes would almost certainly have reversed much of those losses, but that was effectively ruled out when Bernanke himself discussed tapering being possible some time in the upcoming 3 meetings. The only way a Fed member could have done any more to prepare markets for today would have been to say "The minutes on May 22nd will reference that some of us thing we should taper soon."

Net/net, the Minutes were about as balanced as one would expect given the recent communications, but if we rewind to late April, the current tenor would seem downright precipitous. In that regard, the first 3 weeks in May have done an extraordinary job of getting expectations in the right place, but unfortunately that's still a bad place for MBS and Treasuries. It's a place where we understand that the Fed is going to keep buying long-term assets, but one in which there's clearly a drive to reduce the overall amount of those purchases in order to mitigate system shocks in the future.

In other words, they don't want QE to end like it began--with an abrupt change to the balance sheet of many hundreds of billions of dollars. Instead, it seems clear the Fed wants to ease us into things this time around. Metaphorically, "adding QE" is like an ER visit whereas "removing QE" is like weeks and months of physical therapy.

Bottom line, even though the "hype" isn't this massively negative realization for bond markets, it is still very real, and precludes a triumphant directional bounce back for bond markets. On the bright side, we've gone no lower since the Minutes release, but neither have we really done much at all. Without fear of exaggeration, today was all about Bernanke this morning. The biggest movement in prices and volumes was seen then, and it was left to Minutes to either confirm or surprise. They didn't surprise and here we are hovering just under 102-00 in Fannie 3.0s and just over 2.0 in 10yr yields.

Negative reprice risk still lingers for some lenders, but shifts positively for most as long as we continue to hold near 102-00. Keep in mind that a positive shift for most means that we get back to neutral, with only one or two aggressive types standing much of a chance of a corrective positive reprice at this point. Prices have been trending lower since 2:16pm, so we wouldn't get our hopes up for anything yet, and would stay very guarded about negative risk if you haven't seen a negative reprice in a few hours. (hide)

"Participants also touched on the conditions under which it might be appropriate to change the pace of asset purchases. Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome."

"One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so. Most participants emphasized that it was important for the Committee to be prepared to adjust the pace of its purchases up or down as needed to align the degree of policy accommodation with changes in the outlook for the labor market and inflation as well as the extent of progress toward the Committee's economic objectives. Regarding the composition of purchases, one participant expressed the view that, in light of the substantial improvement in the housing market and to avoid further credit allocation across sectors of the economy, the Committee should start to shift any asset purchases away from MBS and toward Treasury securities."

"Members generally agreed on the need for the Committee to communicate clearly that the pace and ultimate size of its asset purchases would depend on the Committee's continued assessment of the outlook for the labor market and inflation in addition to its judgments regarding the efficacy and costs of additional purchases and the extent of progress toward its economic objectives. To highlight its willingness to adjust the flow of purchases in light of incoming information, the Committee included language in the statement to be released following the meeting that said the Committee was prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

"the Desk's survey of primary dealers, conducted prior to the April 30-May 1 meeting, indicated that the dealers continued to view the third quarter of 2015 as the most likely time for the initial increase in the target federal funds rate. The median dealer anticipated that the FOMC would maintain its current pace of asset purchases through December 2013 and saw the second quarter of 2014 as the most probable time for the end of asset purchases, implying a slight upward revision to the projected total size of the Federal Reserve's asset purchase program." (hide)

Before the Joint Economic Committee, Bernanke's prepared testimony has provided an early boost for bond markets. (watch it live) as he essentially says "we know what we're doing.' Here are the bullish highlights:

- Inflation is stable and likely to stay that way
- Policy is providing significant benefits
- Tightening too soon would carry substantial risk
- FOMC has made it clear it's ready to reduce QE if needed
- Policy has helped offset deflation pressures
- FOMC is aware of the risks of QE and low rates
- We'll continue bond buying until substantial labor market improvement

Taken together, these comments do much to address the burgeoning speculation over the past two weeks and provide something of an inoculation against any tapering comments in the Minutes later today. After all, this is the Chairman, whereas the Minutes will give voice to the FOMC members on the other end of the spectrum.

Fannie 3.0s are now up 9 ticks at 103-01 and 10yr yields are down to 1.9002. Bernanke is just wrapping up his prepared remarks and will soon being the Q&A portion. So far so good... With economic improvements (relative) to lean on, low inflation, and strengthening housing market, Ben has room to put pressure on congress regarding fiscal policy and take some of the focus off monetary policy. He looks like he's ready to 'dish it out' a bit today, so it should be interesting.

Keep in mind this speech is distinct from the FOMC Minutes which will be released later today at 2pm. (hide)

10yr yields touched their best levels of the week to start the overnight session and chopped uneventfully higher during Asian market hours while maintaining yesterday afternoon's strong late-day range. The Bank of Japan's Kuroda said the recent epic selling spree in Japanese government bonds isn't having a big impact on the economy and the BoJ stands ready to make adjustments to their QE programs to prevent volatility in bond markets from "spreading excessively."

Treasuries rose to their highest overnight levels after Fed's Dudley--who many see as a reasonable proxy for Bernanke himself--said that the Fed hasn't decided on timing or steps of tapering, and that such a decision would require 3-4 months. He further noted that the Fed wants to make sure markets don't overreact when that time comes, essentially confirming the current "conspiracy theory" of some evidence of "tapering talk" likely contained in today's Minutes, and the preceding scramble to get the word out over the past two weeks.

Bonds got a boost from weaker-than-expected Retail Sales in the UK, which clearly marked the turning point at weakest levels overnight. 10yr Treasuries moved from the mid 1.94's to 1.921 and coasted into the domestic session mostly sideways, but with some pre-Bernanke volatility. The Fed Chairman appears this morning in front of the Joint Economic Committee at 10am. As a "for instance" on the this speech being today's dark horse market mover, RBS characterized it as the "most appropriate opportunity" to get a "signal that tapering in the size of the Fed's monthly purchase pace is imminent."

10 yr Treasuries are currently down 1.4 bps from 5pm at 1.9159 and Fannie 3.0s are up 5 ticks at 102-29. Stocks are slightly higher vs yesterday's 4pm levels, but haven't made it back to yesterday's highs. (hide)

After Fed's Bullard was out earlier with dovish comments, NY Fed Pres William Dudley has now hit the wires with more of the same, and with some MBS-specifics to boot. Fannie 3.0s are up 13 ticks currently at 103-23 and 10's are down around 3bps on the day to 1.937

MBS are reaping greater rewards due not only to spread technicals relating to 10's run toward (and away from) 2%, but also due to Dudley's comments. The NY Fed President suggested that the Fed could decide not to sell MBS when it comes time to reduce its holdings and that this would not only avoid shocks to the market, but also prevent some risk of balance sheet loss.

The fairly simple conclusion concerns supply and demand. If we know the Fed has "lots of MBS," and that they might or might not "sell" in the future, any suggestion that they might "not sell," tips the scales in favor of "less supply" over some indeterminately long time scale, thus having a mildly salubrious effect on MBS. But BE SURE TO NOTE: that positivity is RELATIVE to the rest of the bond market and in that regard, 10yr yields just bounced after breaking below 1.93 (already back up to 1.942). So we may simply be left with MBS prices that give up less if this marks a turning point (or even just a "leveling off") in today's rally. Too soon to tell, but volume and flows make the high 1.92's look like a significant short term resistance level. (hide)

We just had a fairly quick flush of of Treasury prices on an isolated spike in volume. Looks like several big trades in cash Treasuries with some response in futures just after 10am. This took yields into the 1.99s. The volume spike hasn't quite died down and MBS haven't quite decided on the extent to which they'll follow, but so far, we've been holding right around an eighth of a point weaker from the first rate sheets of the day, and look to be bouncing back now.

This is a similar to start to yesterday morning, but with earlier selling this time. The move in Treasuries may have been met with buying support before getting a chance to hit 2.0%. This gives it a bit of a different tone than yesterday (yesterday, 10yr yields just went dead flat after their first rise, and then broke higher), and one that is more hopeful as far as finding a supportive ceiling is concerned.

More important than "hope" for a ceiling is 'respect' for 2.0%. It isn't only significant because it's a 'nice round number.' It's now also the scene of a big volume move and bounce. If 10's head back there and break, it would likely be bad for MBS. For now, with 10's back to 1.979 already, MBS are off their lows and we're likely avoiding reprice risk for now. (hide)

Treasuries traded flat to slightly weaker in the Asian session and 10's just hit 1.972 heading into the European hours. After 2 hours of light selling (higher in yield), German bunds reversed course and went back to a choppy range near opening levels, pulling Treasuries down in the process.

The stock lever has been fairly well connected overnight and this morning (something we haven't seen much recently, and not an uncommon side effect of "auto-pilot" mode when preparations for hotly anticipated data have already been made.

10yr yields never made it under 1.95 overnight and early domestic trading started dragging yields higher. We say 1.977 just after 8am, but are at 1.970 currently.

MBS opened flat to yesterday's close and have moved lower 3 ticks so far this morning to 102-08. S&P futures dipped with Treasury yields overnight, but have also bounced back this morning, now indicating a moderately positive opening bell for stocks.

Fed speakers are the only notable events today with Bullard at 11:30 and Dudley at 1pm. (hide)

After topping out at 8:54am, bond markets have ebbed in a linear fashion, back in the other direction. Equities rose out of the gate and there's potentially a small bit of intraday stock lever in play, but things have been too disconnected on that front to draw any solid conclusions.

Whatever the case, 10's are up from 1.92 to 1.94 since 8:54am and MBS are down from 102-24 to 102-20. Early rate sheets most likely took their marks with Fannie 3.0s at 102-22, so we're not quite into 'reprice risk territory' yet.

On a final note, the 1.94 area in Treasuries is both an intermediate and intraday pivot point (meaning it's been more likely to result in bounces vs breaks when approached from either side). We've seen a good bit of sideways grind between there and 1.938 in the past half hour so the next break higher or lower by more than a few bps could result in a bit of follow-through momentum (to around 1.955 on the upside and 1.918 on the downside).

The latter could pose problems for MBS, where Fannie 3.0s would stand a good chance to move into negative territory, making reprice risk more of a reality. (hide)