After an absence of scheduled economic data this morning, tomorrow offers Import and Export Prices at 830am and a monthly look at the Federal Budget at 2pm.

The auction cycle continues as well, this time with everyone's favorite Treasury benchmark, 10yr notes at 1pm. Eurozone headlines remain a constant "unscheduled" factor, and probably more of a market mover than any offering from the domestic econ calendar (depending on the headline). For a detailed look at all the economic events from this busier-than-normal week, check out the following link:

Rumors of China buying Italian Debt sent stocks soaring, bonds selling, Reprice Alerts alerting... But markets were quick to dismiss this as a legitimate cause for a rally and MBS have been quick to regain their footing. No more risk of reprices for the worse at current levels.

(WSJ) News reports that Italy is in talks with China to buy some Italian sovereign debt have completely turned around the stock market. The Dow has regained about 100 points in a very short period of time and is now down only about 50.

Pop quiz. This is a clear demonstration of:

1. How much of a grip Europe has on our imagination right now
2. How little good news it takes to flip everybody’s risk coaster right back to green
3. How headline-reading robots have completely replaced thinking humans in the market
4. How short our memories are — after all, the ECB has been buying Italian debt for weeks now, without actually solving anything. Will China buying the debt be that much of a help?
5. All of the above
6. None of the above

Update: from the FT by way of Bloomberg, of the talks:

The Italian government is making approaches to China with the aim of selling the cash-rich Asian country “significant” quantities of Italian bonds and investments in strategic companies, FT reports.

MBS are at their lows of the day with 4.0's down 9 ticks to 104-07. 10yr notes are almost touching their highs of the day, currently up 2.5 bps at 1.941 and well outside the recent prevailing range. The move coincides with a fairly big uptick in stocks so we might look there for further correlation. This could result in reprices for the worse if the current weakness is maintained or worsens.

In any given auction week, there's normally old US Treasury debt maturing and being paid back to the public, which can support some degree of reinvestment into the auctions at hand. This week's auctions don't have that.

They also occur at a time when yields on TSY debt are at their all time low. So the fact that the Bid-to-Cover on today's 3yr auction came in at 3.15 dollars offered for each dollar auctioned, and that the high-yield stopped through slightly lower than 1pm When-Issued levels suggests that today's auction was healthy, even if it wasn't a superstar. Indirect bidding was slightly weaker than average.

Markets are trading this one as a relative non-event. MBS and Treasuries alike continue to trade flat on the day, but within ranges. Fannie 4.0's are bouncing sideways between 104-10 and 104-14. Volume is fairly light and markets are likely waiting for bigger shoes to drop, such as a potential Greek default as well as more robust economic data and auction offerings later in the week.

3 year auctions have been strong recently. The last SIX auctions have seen high yields come in lower than the 1pm "when-issued" yield. ("when-issued" or WI can be thought of as the running estimate of where an auction's high yield will come in or "stop"). Additionally, every 3yr auction in 2011 has seen higher than a 3.0 Bid-to-Cover (BTC), with the last six being over 3.20 for an average of 3.25. Indirect demand hovered in the low to mid 30's during those 6 auctions but ticked up to 47.9% on the most recent one. There are inherent challenges with this being the lowest yielding 3yr auction (ever) which will be balanced out by the fact that the shorter end of the yield curve simply hasn't moved much since the FOMC announcement with the "mid 2013" target. Not only that, but an as-yet unresolved Greek default could be a phantom force of levity for bond prices in the short term.