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MBS prices rose to their highest levels in over 2 months today as stocks and Treasury yields fall to their lowest levels of the month. Fannie 3.5 MBS were already having a pretty tough month back in October when the last iteration of an EU Summit captured the market's attention. As 10yr yields rose from historic lows in the 1.7's, MBS prices plummeted from 103-09 to 100-20. They spent most of the month languishing sideways just above those levels and the impending EU summit near the end of the month...

One of our colleagues put it best a moment ago when he said: "looks like the market isn't moving much... Headed to lunch..." Indeed after an exceedingly muted response to the treasury auction which has seen us neither rise or fall more than 2 ticks, everyone's permission slips to exit the building for lunch have now been signed. After ticking down to 101-19, MBS look fairly stable at 101-21. The 10yr tsy continues to fight off the evil ceiling at 3.27. Although it bounced right around that level twice--once before and once after the auction--it's actually at 3.255 at the moment. The star of today's ball, the 3yr is very much as it has been: around 1.38....

Given our recent admonitions about waiting for NFP as the most important data event of the week, the directionality of today's rally would lead us to half fear / half expect some sort of retracement. Whether it's to be attributed more to technicals, profit taking, or stock lever, or round 2 of Goldman's penchant for insanely accurate11th inning NFP revisions. we've finally seen enough of that correction to discuss it. However, it should be noted that the magnitude of the correction is not nearly what we'd expect to see on the sort of inconsequential and technically driven directionality of week's past. So once again, although we're obligated to say it CAN happen as far as reprices are concerned, it likely WON'T happen. Not yet anyway....

We're now at the point where we're prepared to get confirmation from the yield curve. The bottom of the yield range for the 10yr tsy is around 3.30 with current yields at 3.33. It would be a bit of a stretch for things to break meaningfully through there today. Also, with MBS prices this high, it's hard for things to push higher without the risk of profit-taking. Whatever the case, there is one glowing positive from today, and that is WE'VE MANAGED TO HOLD ABOVE RECENT RANGE HIGHS AND IF THAT IS ACCOMPLISHED 2 DAYS IN A ROW, IT'S ANOTHER STEP IN THE RIGHT DIRECTION. Only major word of caution is that UNTIL the 10 yr shows us it's willing to go BELOW 3.3, we can't really assume ongoing bullishness, or at least not with as much certainty. That said, today's price levels are hopefully good for some of the best rates you've seen in the past four months. ...

As stocks continued a trend of selling that began shortly before the noon hour, bonds have rallied with MBS reaching up to familiar levels. The 4.5 is currently up 14 ticks to 100-28 which has and may continue to prompt reprices for the better. The 10yr tsy shot to its own version of familiar levels with yields prodding yesterday's lows at 3.39. Just before 2pm, stocks turned the corner. For the S&P that was a level of 1061. That index is back up to 1065, lower than the 1068 open, and well off the highs of the day at 1074, but more than enough of a correction to convince bonds to turn their own corner....

The minutes from the most recent Fed meeting are out and though no measurable response is present in MBS, at the very least, it can be said that the previous momentum of the rally is remaining unchallenged. Chalk this up to the following positives from the FOMC minutes:...

Any time charts start to take shapes similar to those seen above, reprices for the better are usually not far behind. One thing we continually mention is the necessity of a stock market correction in order to validate any meaningful gains in the bond market. Though stock losses today and Friday (if you could call them that) are nothing to write home about. Overall, the improving range for stocks is not in jeopardy yet. ...

The charts tell the same story that we set up for this AM in that the early data had little to no impact on trading action with auction providing the true impetus for movement on the day. A lack of acknowledgement from prices is readily understood when we see that they completely ignored better than expected data and kept grinding into a narrower range--virtually honing in almost exactly on PAR. After the auction, it's a different story. As opposed to a narrowing range with a series of lower highs and higher lows, we see a decided move up with higher highs and higher lows, the entire affair at a much steeper angle of attack than previous directionality. As we approach the last hour of trade, we're nearing the band of price levels that marked the upper limits of last week's very prominent range. All of the preceding graphically represented here:...