Bond markets made a quick head fake in a weaker direction following the better-than-expected Consumer Sentiment release at 9:55am, but must have quickly remembered that it's Europe, and not the domestic consumer, that's at the heart of the ongoing epic flight-to-safety. Indeed, today is one of those days where bond markets and the European currency are very well linked-up, the latter taking it's first major cue of the morning on news out of Spain that its wealthiest province officially asked for help from the Spanish government to service its debt. Since then, the Euro fell to test a technical boundary at 1.25, which set up the lows that began the ensuing range trade with the highs ostensibly inspired by levels immediately preceding the Spain news. It's all right here in this chart...

"The Mortgage Bankers Association (MBA) today announced it is increasing its mortgage origination forecast for 2012 by almost $200 billion, due entirely to an increase in refinances. MBA now expects that mortgage originations will reach $1.28 trillion in 2012, up from $1.26 trillion in 2011.

Refinance originations are now expected to total $870 billion in 2012, an almost identical amount to 2011. MBA is slightly lowering its purchase originations forecast for 2012 from $415 billion to $409 billion."

*Claims 370k vs 370k consensus
* Continued Claims 3.26 mln vs 3.25 mln consensus
* Previous week revised higher to 372k

In the week ending May 19, the advance figure for seasonally adjusted initial claims was 370,000, a decrease of 2,000 from the previous week's revised figure of 372,000. The 4-week moving average was 370,000, a decrease of 5,500 from the previous week's revised average of 375,500.

The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending May 12, unchanged from the prior week's unrevised rate.

The advance number for seasonally adjusted insured unemployment during the week ending May 12 was 3,260,000, a decrease of 29,000 from the preceding week's revised level of 3,289,000. The 4-week moving average was 3,271,500, a decrease of 17,250 from the preceding week's revised average of 3,288,750.

There are a few things working against bond markets at the moment, not the least of which is the fact that they've rallied rather ferociously earlier this morning and are showing signs of tiring. But like the rally itself, those "signs of tiring" have more to do with what's going on in correlated markets as opposed to bond markets themselves. In other words, if the proper cues were given from stocks, the Euro, and European bonds, then US Treasuries and MBS might not look so exhausted.

But as it stands, the aforementioned 'usual suspects' are doing more to put up road blocks for advancing bond markets as opposed to waving them through recent resistance levels. The Euro saw it's lowest bounce of the day around 12:30pm New York time. Surprise surprise, so did stocks. That rebound in "risk-on" (and believe us, we use the term 'rebound' very loosely) has translated to a bit of momentum for stocks and a bit of sideways indecision for bond markets.

Basically, the cues are not presently there for bond markets to keep on rallying. The 5yr Auction was mostly a non-event, but wasn't a net-positive for longer-term yields. Perhaps the biggest consideration at the moment is that the Fed is buying (scheduled "twist" buying) 6-8yr Treasuries at the moment, which we're tempted to credit with keeping the mid-to-long end of the yield curve a bit better-sponsored than it otherwise might be.

While we certainly can't predict or know what will happen at 2pm when that buying is done, we are quite interest in what markets do at that time, if anything. If stocks and the Euro continue to recover, and Treasury yields continue holding some sideways ground at current levels, we could be looking at the best levels of the day as a thing of the past. Then again, a Euro-zone official might say something interesting that counteracts any of this potentially pent-up negative energy.

Either way, we'd keep an eye on an MBS pivot at 104-14 in Fannie 3.5's, and are especially interested in how it's doing in about 25 minutes from now. If prices fall decidedly lower, lenders would likely be considering negative reprices with a break of 104-12. In other words, a break below 104-14 means it's time to pay closer attention, and a break of 104-12 would warrant an increasing level of concern.

U.S. house prices rose modestly in the first quarter of 2012 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The FHFA HPI was up 0.6 percent on a seasonally adjusted basis since the fourth quarter of 2011. The HPI is calculated using home sales price information from Fannie Mae and Freddie Mac mortgages. Seasonally adjusted house prices rose 0.5 percent from the first quarter of 2011 to the first quarter of 2012. FHFA’s seasonally adjusted monthly index for March was up 1.8 percent from February.

“Consistent with other housing market indicators, the FHFA HPI showed stronger house prices in the first quarter, most notably in March,” said FHFA Principal Economist Andrew Leventis. “Increased affordability and a somewhat smaller inventory of homes for sale are positively impacting house prices.”

FHFA’s expanded-data house price index, a metric introduced in August 2011 that adds transactions information from county recorder offices and the Federal Housing Administration to the HPI data sample, rose 0.2 percent over the latest quarter. Over the latest four quarters, the index is down 1.3 percent. For individual states, price changes reflected in the expandeddata measure and the traditional purchase-only HPI are compared on pages 24-26.

While the national, purchase-only house price index rose 0.5 percent from the first quarter of 2011 to the first quarter of 2012, prices of other goods and services rose 3.2 percent over the same period. Accordingly, the inflation-adjusted price of homes fell approximately 2.6 percent over the latest year.

Markets bounced on Tuesday as the magic word "eurobonds" was heard — new French president Francois Hollande is keen and Christine Lagarde at the International Monetary Fund has endorsed the principle of more debt-sharing in the eurozone. Today share prices are down partly because investors have remembered that we've been round the houses on eurobonds several times already during this crisis and the debate always comes back to the same point: Germany is reluctant to underwrite the debts of its neighbours. That reluctance looks entrenched as ever, whatever Hollande and Lagarde might wish.

In what circumstances might German budge? Gary Silverman of Swordfish Research has the answer — "only at one minute to midnight if the alternative was a complete collapse of the system."