In discussions regarding upcoming Treasury auctions you’ll often see us use the phrase“pricing in a concession.” Although the latin root of the word concession means “to give way,” perhaps the most interesting and pertinent definition for our purposes is “to acknowledge (an opponent's victory, score, etc.) before it is officially established.” In this case, the opponent is the upcoming supply of Treasury debt. There are essentially two opposing forces at work in the auction process. The Treasury on one end, who’d like to be paid the highest price possible (lowest yield) and on the other end we find market participants that bid on debt inventory who’d like to walk away paying the lowest price possible (highest yield). So in that sense, with $66 billion in debt auctions approaching in the days ahead and the market having rallied prices significantly higher since the last round of auctions, market participants are simply trying to “give way,” or make room for that debt by trading prices lower (yields higher). This doesn’t mean that bond market sentiment is shifting bearishly for the month ahead, we're just witnessing a short-term strategy aimed at cheapening up prices before the auction process begins.

The term "hawkish" describes a monetary policy point of view that supports higher interest rates. (Reuters) - Weak jobs figures on Friday do not change the fundamental outlook for the U.S. economy and monetary policy could be tightened by the end of the year, a top Federal Reserve official said on Monday. Philadelphia Federal Reserve Bank President Charles Plosser, a well-known inflation hawk who has a vote on policy this year, has said he believes the U.S. economy was in a gradual recovery. "Certainly, the employment numbers that came out in the United States on Friday were disappointing... But I'm not seeing anything fundamental has changed in my view of the medium term outlook," he told reporters after a conference in Helsinki. He said it was still difficult to draw consistent conclusions on the impact of the Fed's second round of quantitative easing to support growth, dubbed "QE2". Financial markets have begun to discuss the chances of the Fed eventually embarking on another such round of easing -- for now seen as a very remote possibility. Asked about a possible "QE3", Plosser said: "The hurdle rate for doing more is very high."

Rate sheets look like they'll lose some bps this morning as the bond market begins the week on a negative note thanks to a short-term bias to sell into strength in preparation for $66 billion in Treasury debt auctions (on Tuesday, Wednesday and Thursday). Adding some confidence to that point of view, this price action is playing out regardless of continued weakness in global equity markets. Furthermore, trading activity was light in the overnight session as China was out on holiday. This left algorithmic models in charge of directionality. If given the opportunity these pre-programed quantitative trading models will be urging traders to sell on overbought technical conditions in an effort to cheapen-up bonds before the auction process beings tomorrow. At this point, with the Fannie Mae 30-year 4.0 MBS coupon down 6/32 we'd expect loan pricing to deteriorate anywhere from 10 to 25bps depending on how aggressive your lock desk left rate sheets on Friday.