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.

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.

Treasuries spent most of the overnight session in weaker territory before beginning a grind lower in yield in the few hours leading up to the domestic open. Weaker Yen and Japanese government bonds continued to offer pressure during Asian hours, but European markets didn't play their normal role of reversing said weakness.

German Bunds opened weaker and never made up much ground as peripheral markets tightened (read: Spain and Italy yields fell vs German yields, and anything positive for the periphery has tended to be negative for the core). Lower volume due to holidays in Europe greased the skids for volatility, but the first domestic trading of the day reversed the losses

Treasuries turned positive just before 8am and continued lower to 1.92 just before 9am. They've since bounced up to 1.93 as the day gets underway. MBS opened flat to Friday's close and are now up 6 ticks at 102-23.

Stepping back a few feet and filtering out a relative inconsequential overnight session, you could view this morning's market as a moderate push back against a volatile Friday afternoon. That said, with no data on the calendar and plenty of speculation time ahead of Wednesday's FOMC Minutes (and Bernanke testimony in the morning), volatility can't be ruled out. For now though, confirming a supportive bounce at Friday's lows is "so far so good" with respect to the ongoing set-up of the pre-FOMC range.