The preliminary read on November Reuters/University of Michigan (Penn State loathes you) consumer sentiment  fell 4.6 points to 66.0, much lower than the consensus estimate of 71.0

• The current conditions index came in at 69.6, lower than the 74.0 economists were expecting and worse than October's final read of 73.7.
• Consumer expectations for November  fell to 63.7 from 68.6 in October....again, worse than the market's expectation for 68.9.
• The 12-month economic outlook fell drastically to 67 vs. the final october read of  81. The lowest print since April.
• 1-yr inflation expectations were 2.8% vs the final October's 2.9% final.

Sounds pretty bond market friendly right?

The data was released at 9:55am. Look how the 10yr reacted to the news. Yields moved higher...hmmm why?

I purposely left out this last portion of the survey: 5-yr us inflation expectations ticked higher to 3.1% from 2.9% in October.

In reaction to the data, the 5yr note yield has been the worst performing maturity on the yield curve.

So does it matter? Is the market taking this data seriously?

While intraday trade flows dont necessarily represent a long term strategy in the rates market, there is still reason to mark and highlight this event in your trade journal. Remember our commentary on the last FOMC statement?

HERE is it is if you need a refresher. Although there were several changes to the statement, only one really stood out to us.

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Notably the verbiage about "inflation expectations".  Again, we must remind that the market is still operating with a bias towards short term trade tactics (READ MORE)....however it is very important to point out that Consumer Sentiment inflation expectations are one of the metrics the Fed indicated they would consider when deciding whether or not to raise rates.

Remember what's important: resource utilization, subdued inflation trends, and stable inflation expectations

BIG PICTURE perspectives behind us, while 5s took the biggest beating, the reaction farther out the curve wasnt favorable either. The 2s/10s curve steepened 3bps from 260 to 263. This plays into the recent evolutions of the market's bias to churn profits via letting the yield curve steepen.

Basically what I am saying is, while the Consumer Sentiment data was 90% bond market friendly, rates still reacted poorly. This is a function of where trader's are currently positioned and their short term bias...more simply, the post bond auction rally had moved far enough and it was time to consolidate and book profits. The one bond bearish part of  the Consumer Sentiment data was just the catalyst/excuse.  The range trade persists.

Staying conscious of the market's perception of the fundamentals is a necessity, however, in the trader's paradise we are operating in, the most pressing task is keeping  a close watch on where the market is positioned and how far trader's need to push prices to book a profit. We feel this was illustrated perfectly this morning.

I have yet to really address mortgages today...that's because "rate sheet influential" MBS coupons just keep plugging along in their own little supply-less world. There was some post data chopatility, but it didnt last long.

Check out the FN 4.5 two day. Cool, calm, and collected.

The FN 4.0 is currently +0-05 at 99-02 yielding 4.099% and the FN 4.5 is +0-05 at 101-21 yielding 4.298%. The secondary market current coupon is 4.189%. The CC is +75/10yr TSY and +64/10yr swap. Rate sheets are improved.

We are watching the yield curve, waiting for the steepener trade to be fully unwound. Until the steepener bias evolves, we don't expect rates to make much of an improvement past 3.42%. But does it even matter to mortgages? The FN 4.5 has paid no attention to the steepening curve. It wont matter if rates continue to bounce in the recent range, MBS buyers have not missed an opportunity to buy lately. It wont be a huge deal for rate sheets unless the market decides it wants to let the curve go steeper and steeper. MBS yields are too low and relative value is too expensive to let this tightener go on for much longer...it has to stop at some point.

But we find it hard to believe the steepener trade will push the curve past record levels....

HERE is a Plain and Simple about the shape of the yield curve and relative value