After rallying consistently for two weeks bonds have reached overbought status, making upcoming debt auctions and economic events that much more important in the process of confirming a shift "Down in Coupon".

We view bonds as having transitioned from a bullish bias to a defensive tone, one that supports profit taking and short selling into rates rallies. That means that we're not feeling so great about the prospects for floating over the next week to 15 days. This defensiveness/bearishness will remain in place until we see another round of short covering and the market illustrates a sustained will to buy bonds in size.

Several yield levels overhead (using 10's as a benchmark) are possible supportive locations, most notably we view the range between 3.31 and 3.40% as being the most supportive into a sell-off.  Believe it or not, that would still be in line with the long term bullish trend we are following...

Trying to foresee the future isn't as important as simply getting defensive here unless something unexpected happens in today's 10yr auction. Either way, it would need to be bullish enough to get us decisively through 3.14 resistance, something we don't see as exceedingly likely unless a "miraculous" event transpires today. The absence of such an event would simply serve to reinforce the defensive stance we've communicated, even if yields aren't immediately skyrocketing.

What's at Stake?

Aggressive C30 4.75% loan pricing (4.50% FHA). 4.75% C30 loan pricing all-together really. Same goes for FHA 4.5 rates.

NEXT EVENT: $29bn 10s at 1pm. The "when issued" 10yr note is currently trading at 3.244% (a key support level between here and 3.31%)