• Bonds Rally on extension of overnight trade and supportive domestic data
  • MBS 4.5's up 14 ticks to 100-14
  • 10yr Tsy up 22 ticks.  Yield down 8.6 bps to 3.732
  • Stocks Down Slightly
  • $40 bln in 3yr Notes, auctioned at 1pm
  • Curve flatter 6bps - MBS agree with "down in coupon" preferences

It's been a good morning for sure!  Only on rare occasions do we see the entirety of the "drop" recovered in the following session.  The question on all our minds: is this positivity here for more than a fleeting moment?

The only way to answer this question will be with the treasury auctions over the next few days, beginning with the 3yr at 1pm today.  From a purely technical standpoint, it's FANTASTIC to see the 10yr fall BELOW 3.75 and "bounce" off that 3.75 ceiling.  In other words, it WAS resistance and now is being tested as support.  Without being too myopic, it's a near certainty that the deciding factor in that test for today will be the auction.  Hence: all eyes on it!

In my mind, it's really that simple...  Here we are in our new, uglier range in 2010.  We catch a decent confluence of data and overnight trade to suggest a test--a "minor incremental ratcheting adjustment to the next lower range," if you will.  And that twist of the ratchet will now be tested.  Pretty simple.

The only thing that ISN'T simple is determining what sorts of auction results would lead to what sorts of reactions.  Fortunately, we'll be here with the play by play to let you know how things are shaking out in the immediate wake of the auction.  Again, that's at 1pm Eastern.

One other thing to keep in mind, the longer end of the curve isn't always as informed by the shorter duration auctions.  In other words, there's a chance that significant movements in the parts of the yield curve that relate more closely to the MBS that dictate rate sheets may not give an extremely clear indication.  There are even some varying levels of resistance to add extra confusion to the mix.  Take a look at why support at 3.75 may not be the final word for the 10yr.

The message in the above chart is that although 3.75 is certainly the most significant and established resistance, it's not the last word on the topic.  We'll see how many of those pearly gates we can break through should auction results allow.