So the 10yr note and the Fannie 4.0 MBS go to the amusement park together. MBS say they're ready to go on an exciting ride. 10yr warns "are you sure you can handle it?" MBS says "no worries, bring it." And so it was that the longer end of the yield curve, hand in hand with the lower end of the MBS stack embarked on the second phase of the post FOMC rally. In fact, earlier in the day, MBS had been outperforming Treasuries. Or to use our amusement park analogy, they'd been more eager to get on the ride and get their thrills. But shortly after "the bounce" came as 10yr notes approached their all time lows, the abruptness of the swing was too much for MBS to handle. MBS like the rally, but not the volatility. Their previous outperformance has eroded as a result, but things are far from bad. While a 10bp losing streak in 10yr notes might be scary on another day, currently, that leaves 10's at 2.1786. Fannie 4.0's are now "only" 1 full point better on the day at 104-01. Reprices for the better have been seen, but please keep in mind not to expect lenders to be able to pass along a proportionate amount of gains until things settle way down.

10yr notes and MBS 4.0 coupons alike were probably a bit awestruck after the FOMC Announcement. Where was the love for them!? Well, the "love" appears to be on the uptick now, except that it's being delivered by trading action in the markets instead of Fed Policy. After all, the FOMC rate decision is very much a concern of the shortest maturity rates. In terms of the 2s/10s curve, that means 2's are the most sensitive to the FOMC. That was abundantly clear as 2's plummeted while 10's expressed a bit of indecision. 4.0's were standing right there with 10's, not really sure what to do. But now, the shape of the yield curve is shifting in the favor of longer duration securities. Reason? The initial reaction (which favored 2's) was to the 2013 date given. But now, the market is reacting to the rest of the statement. To oversimplify: "oh! there's other info in that thing besides the 2013 date? I'll be darned! I guess things are pretty bad..." So now we're seeing 10's catch up with shorter duration parts of the curve. It's an honest to God facemelter.... 10's are 17 bps lower on the day at 2.13, but who the heck knows where they'll be by the time you read this... Fannie 4.0's are up over a point at 104-03. 3.5's are in "soon-to-be-new-production-coupon" territory (would have to STAY at these levels) currently at 100-24. What had been "up in coupon" is now "Down in coupon." Short term opportunism on the 2013 date is now long term panic. Buckle up folks...

It's pandemonium folks. The Fed knew darn well what they were doing. Not since 1992 have there been 3 dissenters on a vote to approve the text of an FOMC announcement, but that's how controversial today's decision was to lay out a firm timeline on what had previously been "low rates for an extended period." Markets have now been given a date: "mid 2013," making 2yr notes more "cash-like" than they've ever been. From the high 0.2's earlier, 2yr notes plummeted to 0.18. The middle of the curve, especially 5's, dropped even more. The long end of the curve is lagging. That makes sense considering the Fed just guaranteed the short end and said nothing about the long end. Earlier in the reaction phase, the yield curve was noticeably steeper. Higher MBS coupons were outperforming the lower (because higher coupons have shorter durations, so it's like the MBS mimicking the yield curve). There's much more to discuss on the aftermath from this FOMC statement, but for now, just be aware there's a possibility of reprices for the better.

If we didn't have an FOMC announcement on the docket the current MBS chart is starting to get that "potential reprices for the better" look about it. We're up about 4 ticks (eighth of a point) to 102-30 since the results of the 3yr note auction came in. The high yield was slightly lower than expected. Demand was just slightly higher than the average of the last 4 auctions and demand from indirect bidders was stellar. 10yr notes are a almost 2bps lower since auction and stocks are fairly flat. Looks like markets are indeed waiting for FOMC, but perhaps with the slightest of bond-market-friendly lead-offs. Some plucky young lender might reprice for the better here, but no guarantees. Additionally, anything can change in a NY minute.

(Reuters) - Investors increased their U.S. Treasuries holdings as fear about the European debt crisis and a steep selloff on Wall Street unleashed a stampede for safe haven, a survey showed on Tuesday. The rush into U.S. government bonds has occurred despite Standard & Poor's stripping of the United States' long-term AAA-rating on concerns over its high indebtedness last Friday. The share of investors who said on Monday they were long, or holding more Treasuries than their portfolio benchmarks, rose to 11 percent from 6 percent last week, J.P. Morgan Securities said on Tuesday. In early July, no respondents were long Treasuries, something that had not happened since February 2005. The surge in Treasuries purchases knocked short-dated U.S. yields to record lows on Monday. For more, see US/ Growing positions in Treasuries bode favorably for this week's August quarterly refunding when the U.S. Treasury Department is scheduled to sell $72 billion coupon-bearing securities. According to the latest J.P. Morgan survey, the share of investors who were neutral, or owning Treasuries equal to their portfolio benchmarks, was steady at 74 percent. The share of investors who said they are short on U.S. government debt, or holding fewer Treasuries than their benchmarks, fell to 15 percent, the lowest since April 25. The net shorts -- the difference between shorts and longs fell to 4 percent its lowest level since late February. In early Treasuries trading, prices on benchmark 10-year Treasury noteswere down 17/32 for a yield of 2.38 percent, up 6 basis points from late on Monday but down 23 basis points from a week ago. (Reporting by Richard Leong; Editing by Kenneth Barry)

(Reuters) - Small businesses in the United States grew less optimistic about recovery prospects for a fifth straight month in July, according to the National Federation of Independent Business. The NFIB's Small Business Optimism Index fell 0.9 point in July to 89.9, largely because of weaker expectations for real sales gains and reduced hope for an improvement in business conditions in the next six months. William Dunkelberg, chief economist for the small business group, said that aside from concern about future sales, the 1,817 respondents to the survey seemed troubled by other, less easily defined worries. "The debt ceiling madness" may be acting as a damper on businesses' willingness to hire and invest, Dunkelberg said. "Twelve percent (seasonally adjusted) reported unfilled job openings, down 3 points, suggesting that the unemployment rate will rise," the survey summary said. Some 50 percent of respondents said their firms had made capital outlays in recent months, unchanged from June and still an historically weak reading, it said. (Reporting by Glenn Somerville, editing by Neil Stempleman)