Thursday turned out to be ridiculously narrow given that it followed FOMC Day.  Then again, if you tend to agree with the assessment that Bernanke and The Fed basically put the onus for QE guidance on economic data (we talked a bit more about that in yesterday morning's post), and that economic provides the "scheduled" component versus the "less scheduled" European component to form general market guidance, then yesterday made perfect sense.

Simply put, Europe moves bond markets and to an increasing degree after Wednesday's FOMC, so does/will/should domestic economic data.  Europe kicked things off in a positive direction in the overnight session.  Then, relatively crappy Jobless Claims data helped bond markets strengthen into the domestic session.  But the gains sort of stalled before building any momentum.  We were wondering if that was due to markets indeed being more focused on this morning's GDP or if we were maybe missing something--some phantom force of resistance.

Fortunately, that "less scheduled" European component has already cleared this question up.  After going out just under 1.95, 10yr yields are already down under 1.90 at the start of the European session after S&P downgraded Spain right after Domestic bond markets closed (so much for phantom forces of resistance...)  If this move is maintained throughout the overnight session, and isn't "undone" by better-than-expected GDP, it will be seen as the first attempt at kick-starting momentum after the recent sideways slide between 1.95-ish and 2.04-ish 10yr yields. 

Consumer Sentiment at 9:55am might account for a slight adjustment to whatever tone is created by GDP at 8:30am.  But certainly, the latter is the top-shelf data for today.  It's going to need to be pretty ugly if we're going to make very much progress down into the 1.8's.  More than a few traders will be looking to re-short the lower we go in the 1.8's, in the hopes that next week's less optimistic data forecasts will help Treasuries find a short term range boundary.  

Finally, MBS...  We actually wouldn't want this Treasury rally to run too far today.  "Ratcheting" gradually lower in Treasury yields provides a more fertile environment for MBS than do face-melting rallies.  Lender rate sheets are similarly beholden to MBS volatility.  In other words, MBS appreciate stable rate environments in general and Lenders' rate sheets appreciate stable MBS.