Answer: When prices are better by half a point on the day with absolutely no volatility... The half point improvement portion of the above answer is easy enough to understand with 4.5's being up 16 ticks at the moment. Volatility will be best demonstrated in the following chart by the incredibly tight range of movement between highs and lows. Keep in mind that this is just intraday volatility whereas the more conventional measurements are concerned with how far prices move (or might move) from previous levels. So although we are half a point up on the day, the gap between lows and highs is incredibly narrow since the initial reaction to GDP.

As originators scramble with last minute closings (not so much with new TIL) there has been an end of month hustle and bustle about the MBS market this morning. Servicers are buying "down in coupon" while the Federal Reserve eats up minimal originator offerings (less than $1bn). "Rate sheet influential" MBS coupons are doing a decent job of keeping up with benchmark big brothers as yield spreads are slight tighter in current coupon MBS (we have CC at 4.46%). Other accounts who have previously ignored rates rallies as a reason to move down in coupon seem to be focused more on the middle of the coupon stack than the fuller side. This is illustrated by wider yield spreads in fatter coupons (6.0s). As we discussed earlier this week...we believe this is a function of the Obama putting more pressure on loan serivicers to get busy with the loan modification program. So...the day traders who have been free from "prepay risk" anxiety are having second thoughts on their willingness to test the program's powers

If no one else, you can always count on us to point out when we were right. At 2:15 PM we gave you the following chart before any bounce had occurred at either price level and suggested the levels looked good for a "bounce." Even before then, AQ said this am: "we'll go out on a limb here and say there is a decent possibility of a post auction rally." More important than a random good guess is the fact that AQ derived his prediction from the following logic in the post before the auction results were out: "One has to assume that, based on the results of the previous three auctions (good demand for 20 YR TIPS, crappy demand for saturated 2s market, crappy demand for 5s)...that the fixed income investment community is setting itself up for a FLATTENER TRADE following the auctions. This implies...bets are for a flatter yield curve in the near future...which is a good thing for "rate sheet influential" MBS" So how'd that all turn out?

Some traditional post auction volatility has entered the scene. As stocks have continued to move higher and profits have been taken, we've seen a retracement in bonds. At this point, it appears to be technical in nature and thus not a major cause for concern. Pretty much, the only people that need this update are those who got a reprice for the better after the auction and want to avoid a potential reprice for the worse. All others: no reprice for the worse should arise from this selling. Furthermore, the internal trendline at 3.65-3.66 (aka 3.65+) looks very pertinent for the rest of the day. Wouldn't be surprised to see a bounce... So again, this post is ONLY for folks that saw a reprice for the better following the auction, and I know most did not. FURTHERMORE, if you DO get a reprice for the better AFTER 2pm, it's likely this selling will have been baked in to that.

One has to assume that, based on the results of the previous three auctions (good demand for 20 YR TIPS, crappy demand for saturated 2s market, crappy demand for 5s)...that the investment community is setting itself up for a FLATTENER TRADE. This implies...bets are for a flatter yield curve in the near future. This could be a function of TSYs being oversold and stocks being overbought (STILL). Could be a function of the market's expectation for WEAK ECONOMIC NEWS ahead (Eurodollar futures market says so at least).Could be a function of TSY supply being behind us. Either way...this is the most logical reasoning we can put behind the question: WHY THE LONG END OF THE YIELD CURVE IS HOLDING UP SO WELL WHILE STOCKS SHOOT THE MOON.

Recap Of Last Session * Durable goods weaker than expected, lends to early fixed income strength * Once again, bonds rallied into a tsy auction and sold off therafter * 4.5's got as high as PAR, sold off just over half a point and ended the day at 99-24, 2 ticks higher than the open * Same movement pattern for tsy's with the 10yr ending where it began around 3.66-ranged from 3.63 to 3.73 on the day * 5yr Note auction was the primary driver of the markets What's Going On Today * 10 yr backed up 3 bps from 3.66 to 3.69 overnight as European and Asian markets price in some more caution ahead of today's 7yr note auction. * Stock lever also in play as nocturnal indexes mostly higher. Domestic futures slightly positive * 1st ticks of the day in MBS come across within a tick of yesterday's last ticks. For 4.5's that was 99-23 * 10yrs off their O/N (overnight) high yields by a tick or so, hitting the screens at 3.68

Following the crappy 5 yr note auction....the long end of the yield curve sold off and "rate sheet influential" MBS prices ticked considerably lower. This prompted us to issue an ALERT that lenders were likely to reprice for the worse. After that...the 10 yr started to recover from the post auction "knee jerk" reaction sell off. We started getting a little excited as the 10 yr note made its way all the way back down to 3.65% (green circle). But guess what happened...BANG BANG BANG