If there's a kind of storm that's not quite perfect, but still pretty darn good, this morning's confluence of events is getting there.  Here are the ingredients

1. European debt rally (a big one).  German Bunds moved into new all-time lows overnight and went on another push lower as the US session began.  This coincided with #2.

2. Month-End buying.  With certain investors needing to buy a certain amount of Treasuries/MBS before the end of the month and with prices moving quickly higher this morning, we're seeing what can only be some month-end buying.  For more on that, read this: 'Month-End Buying,' And Its Effect on Bond Markets.
 
3. Short-Covering.  Short covering happens when traders who were betting on rates moving higher, are forced to buy bonds as yields move lower in order to prevent further losses.  So with #1 and #2 making for an extra push toward lower yields, short-covering merely acts as an accelerant.

If one of these three things is doing the most to motivate the US bond market rally, it's the European debt rally.  By that same rationale, when it changes course, that's when our rally this morning stands the greatest chance of bouncing or leveling off.  Ultimately, we're not breaking into any new ground today with respect to the recently low/narrow rate range.

MBS Are at their best levels of the day, just over yesterday's highs.  Fannie 3.5s are a quarter of a point higher at 102-12.  While a quarter of a point is a solid improvement day-over-day, it's only an eighth of a point higher than most lenders' rate sheet print times, meaning we're just now getting to the leading edge of positive reprice potential. 

10yr yields have moved 4.4bps lower to 2.466 and the S&P is down over 10 points.  The improvement in Treasuries is fairly uninteresting considering yesterday's weakness was fairly pronounced.  In short, it simply puts us right back in the holding-zone that had been intact since last Thursday. 

A break below 2.44 would be a different story (in that it would be more interesting).  As it stands, we're still waiting for next week's big-ticket events to cast a vote on whether we break lower (i.e. move through to 2.3's) or bounce back up, effectively remaining in 2014's established range.  That said, the waiting is much more comfortable today than it was yesterday.

On several occasions in the past, we've seen pronounced reactions to big beats/misses in New Home Sales data.  Today's miss is every bit as big as past 'big misses' (the ones that resulted in big moves), yet we're not seeing much of a response.  Fannie 3.5s have only recovered 2 ticks and 10yr yields are only down to 2.5052 from 2.518. 

Does this suggest a stronger inherent bias back toward higher yields?  Or do the big miss and big revision to last month's New Home Sales data suggest that it's too volatile at the moment to pay much mind?  Maybe some of both?  Whatever the case, the modest bounce is enough to alleviate the reprice risk that had been building ahead of the data.  Here's a run-down of the report:

• June New Home sales 406k vs 479k forecast (annual rate)
• In percentage terms -8.1 percent is biggest drop since July 2013.
• May revised to 442k from 504k
• Northeast down 20 percent, Midwest -8.2, South -9.5, West -1.9
• Supply at 5.8 months, highest since October 2011

Jobless Claims were significantly stronger than expected.

• Claims 284k vs 308k forecast, 303k previously
• Continued Claims 2.5mln vs 2.508mln previously, lowest since June 2007

Bond markets were already quite a bit weaker overnight, mostly following German Bunds' bounce off recent lows (another one).  10yr yields bounced in a similar fashion between yesterday and today.

For their part, MBS aren't under quite as much pressure as Treasuries with Fannie 3.5s down only 7 ticks in price compared to 10yr Treasuries' 11 ticks.  The next significant data is New Home Sales at 10am.