This mornings Live Market Update from MBS Live!  (levels updated):

"MBS Beginning The Week in Much Better Shape. FOMC, NFP Loom 8:44 AM

With the FOMC announcement and Non-Farm Payrolls not happening until Wednesday and Friday respectively, markets have been free to trade the ongoing shift back towards "risk-off." Volume and price action were progressively better for bonds since nocturnal markets began trading at 5pm yesterday. Stock futures mirrored the move in TSY Futures prices. Some of the headline drivers: 

- An article earlier this weekend citing China's state-run news agency Xinhua as saying China could not be Europe's "savior." 
- The Bank of Japan is embarking on aggressive measures to lower the value of the Yen 
- MF Global general malaise seen dragging down "risk-on" sentiment overnight as well. They also got suspended by the NY Fed as a Primary dealer (a status only recently granted)
- And a whole slew of mildly bearish economic headlines out of Europe, including how recent EU Economic Data indicates a tough road ahead.

Cap all of the above off with the fact that it's the last day of the month and bonds might get a boost from more index buying (although some was certainly seen on Friday), and the day is shaping up well so far. 10yr yields are impressively back down to 2.21% and Fannie 3.5's are back at "what EFSF bailout?" price levels at 101-17, half a point better than Friday's close. 

The key at this point is assessing the stability of this shift. If volume stays high enough to validate the price action, and the price action stays stable enough, not only should rate sheets be much improved this morning, but the near term outlook would seem on firmer footing and more ready to digest the upcoming economic events of the week. Today brings only Chicago PMI at 945am, a release that is several orders of magnitude less significant that FOMC and NFP, but a potential mover nonetheless."

Here are a few charts for perspective on where today's improvements bring us in the intermediate and longer terms.  Let's first take a look at what a 101-17 price on Fannie 3.5's means in the context of most of October.  In short, it's good:

In a broader context the "scary" dip down to 100-16 closing level on Thursday fits into a bigger picture of where the lowest limits of fear exist for Fannie 3.5's.  Combined with the ceiling bounce when prices first hit 100-16, this makes a really good case for a last line of defense in MBS prices.  Falling much lower than this suggests a shift back toward 4.0 production and 4.375% or higher in terms of Best-Ex rates.

Moving on to MBS's benchmark big brother, 10yr notes aren't anywhere close to their best levels since 10/7, but at least are back inside their range: 

If 10's have a tough time making it much lower, we'd be hoping again to see supportive ceiling's emerge around 2.35.  Although things got as bad as 2.40+ intraday, it's been 2.358 that's emerged as the highest 3pm closing yield since 8/8/11.  That's pretty darn interesting considering that the exact same level marked the lowest yield of 2010.

While we're not in a rush to be overly dismissive of the recent trauma in bond markets, we're slowly gathering pieces of supportive data in the hopes of confirming that as a ceiling.  Certainly though, it seems that this would rely on this week's FOMC and NFP, Wednesday and Friday respectively.  Things are fairly calm for today.  Chicago PMI had little effect and nothing else on the scheduled econ calendar stands out.