Recent choppy movements in bond markets are trying to trick you.  They want you to believe that something important has CHANGED.  While I wholeheartedly support the assertion that something important HAS HAPPENED/IS HAPPENING, no fundamental CHANGE has occurred.  In short, the waiting game continues.

This may not FEEL like a waiting game...  But that's part of the ruse.  The big, choppy movements are the markets way of keeping us on the edge of our seats--entertained, if you will--despite the distinct absence of a clear winner in the game itself.

The Game: Is the bond market now recovering from the weakest parts of QE2-culture shock?  Cleansing process and/or pain trade subsiding?  2.96-ish = highest yield in 10's for the rest of the year?  Etc..

The Players: Bond market, including MBS, and consequently mortgage rates. The global macroeconimic environment.  The Fed.  The Media.  The Congress. Geopolitical tensions.  And the list goes on...

The Rules: Those siding with the bond market "win" if yields reach pre-QE2 levels and remain there with some stability.  Let's use the 10yr to benchmark the doorway to pre-QE2 at around 2.75.  Opposing team wins a new victory each time a new high is made above the current post QE-2 high of 2.96+. We'll call those siding with bond market "da bulls" and siding with higher yields "da bears."

The Action So Far...

Da Bulls got a little too excited about QE2 and got schooled as Da Bears ran the court  in the days following QE2 after a much better than expected Employment Situation Report.  Yields ran from 2.65 to 2.96 in less than 4 days.  Bulls resolved to take bears seriously and game begins in earnest.

Bulls push back to 2.80 but get no further.  Bears remind bulls of shortened holiday week to come, some stronger economic data, and some positional imbalance in bond market still needing to be cleansed.  Yields back almost to 2.96 again in a couple days.

Bulls take things slower this time, driving yields down more gradually, more methodically.  Positional imbalances starting to clear, sovereign debt drama in Ireland reminds them of the time when Greek sovereign debt drama helped the Bulls out in a previous game.  All that news reporter speak about "contagion" pervades media.  Bulls hopeful recent high yields constitute a double top signifying an end to post QE2 reign of terror by bears.  Yields break previous resistance at 2.80 and head quickly to 2.75.

And then the Empire strikes back. You were there on Wednesday...

Near entirety of bull's efforts wiped out in 1 day (teal oval below).  Some say "moving to sidelines ahead of holiday," some point to strong econ data, hawkish reads on Fed Minutes, easing of global economic tensions (as if!), among other things.  But amidst that carnage, on brave bull musters strength to stand and declare, like Gandalf, "YOU SHALL NOT PASS!"  Apparently he noticed that the 3 distinct highs since the blowout have been successively and ever-so-slightly lower in yield than the initial 2.96.  He must have been thinking that a little chopatility is OK if the overall trend favors the bulls ultimate agenda.

Thus we find ourselves still very much engrossed in "the game."

With the moderately lower yields this morning and surprisingly healthy volume considering the day, we're left to wonder if this rally draws on technical support from the series of lower highs seen along the upper red line or if it is just a pleasant coincidence with what would then be the dominant market drivers: Korea and the Euro-zone crisis.

Both of these phenomena become inevitably relegated to a vanilla FLIGHT-TO-SAFETY (FTS) concept.  Why relegated?  Because I'm not sure anyone is clairvoyant enough to comment authoritatively on the market-based implications of either event with certainty.  So the voices of the financial markets do what they always do in these cases and say things like "investors seeking safe havens due to such and such uncertainty," with any number of buzzwords interchanged of course, but you get the idea.... DRAMA = FTS.

And so it is on this fine Friday that, JUST as the bulls seemed ready to give in to the bear's brutal Wednesday onslaught that the game suddenly turned around, or at least the brutality of said onslaught is on hold.  But that's the important thing... ON HOLD.  Nothing has been decided...the market remains highly tactical.  I mean, in the big picture, this thing still looks like a fairly measured and logical retreat from 2.96!  Sure doesn't FEEL that way to the LO on the street, but the red railroad tracks on the chart above would have us believe otherwise.

Then again, it may not be a measured and logical correction...  It could be that an even bigger blowout was coming and the headlines indeed prompted a FTS bid that saved our butts.  The fact is that a lot is left to play out with respect to those headlines.  With Ireland's acquiescence to EU/IMF aid, pandora's box has opened (again), with Spain and Portugal flying out and landing squarely in their respective hot seats.

Spain's PM says there is zero chance his country will need a bailout and is not planning on stimulus/austerity.  I don't know...  Think he's bluffing?  Some speculate so...  Then there's speculation that EU officials are advocating a bailout for Portugal, according to the Financial Times.  The rationale given by the anonymous sources in the FT story is that Spain (5th largest EU economy) is heavily exposed to Portugal.  So a Portuguese bailout is in the best interest of ensuring stability for Spain.  And since Spain is one of the larger parts of the EU economic landscape, big drama there would create overall EU drama that would make Greece and Ireland look like small potatoes (and olives for that matter).

Naturally, no EU official ever said anything of the sort (according to the EU).  Would you expect anything less?  Do officials ever really say "umm..  yeah... we're pretty worried about them...  yep... no question things are pretty bad there and if they don't take a bailout, the whole lot of us are in a world of ...."  Ha!  If only... 

Far be it from me to figure out who is lying, but IT DOESN'T MATTER.  The simple fact that such a topic is even being discussed reeks of global economic uncertainty.  And that's the bottom line this morning...  probably:  uncertainty = FTS.  And the FTS bid, whether 100% due to headline global events or also drawing on market technicals, still amounts to a rally or "ground-holding" if you prefer, that effectively BUYS TIME for the story of the recovery in the bond markets to play out. 

This AM's gains in treasuries haven't translated quite as much as we'd probably like to MBS, and there are reasons for that, but gains are gains, and the 4.0 is up 7/32 at 101-08.

Plain and Simple: We find ourselves very much engrossed in "the game".  BIG PICTURE economic uncertainty is abundant and short term technicals are teetering frustratingly close to neutral. This means the market is poised to move in whatever direction the next momentum shift takes it. While we believe "da bulls" will defend 3.00% on the 10 year, we recognize the fact that investing perspectives are currently motivated by short term "strategery" and tactical profiteering plans.  Thus floating in the short term is still high risk because interest rates could definitely move in an originator unfriendly direction if da bears win out. The waiting game continues....the QEII cleansing process is still in motion.