By the time we reach the Friday of an NFP week, there's little else left to say or do besides wait for 8:30am.  That's made doubly true this week due to the fact that the other potential big-ticket events did surprisingly little to move markets.  The most likely suspect--the FOMC Announcement--actually ended up having less of an impact than some of the week's top tier economic reports.  That probably has a lot to do with fact that bond markets are guarded against the uglier eventualities of the week AS A WHOLE.

This was evident last week when yields shot higher surprisingly quickly at the end of last week.  At least we think it was evident.  Reason being: most of the movement from the 1.8's to 2.0 in 10yr yields occurred in one day, on Friday.  Take a look:

There are a few interesting things going on here (stocks in blue, 10's in yellow).  First of all, yeah... wow...stock markets are happy and have been fairly consistent in that emotion.  Late December was an end-of-year move to the sidelines ahead of the Fiscal Cliff mini-deal, but other than that, every mid the juggernaut they're purported to be.

Then, notice the ensuing few days at the beginning of the month.  They tell us a lot about what's important to stocks and bonds relatively, and why stocks seem like the tortoise to Treasuries' hare.  Stocks got their main early January lift from the Fiscal Cliff deal whereas that was only half the story for bond markets.  Then on Thursday and Friday, bullish economic data caused another spike in Treasuries without nearly the same sort of directional participation from stocks.  

This has everything to do with the FOMC Minutes.  Treasuries looked intent on establishing a supportive ceiling around 1.85 until the FOMC Minutes changed the game.  The quickest way we can think of to define that is to say that the Minutes didn't suggest the imminent discontinuation of QE3, but they did suggest that we should start maybe, possibly THINKING ABOUT what that might look like.  From that point forward, bond markets were on the defensive.  Big swings from Jobless claims the next day, Big swings from NFP the day after that.  All the while, stocks barely bat an eyelash by comparison because they're not the subject of QE, at least not inasmuch as they're directly involved in guaranteed Fed cashflows.

Shell shocked, Treasuries begin the slow and choppy process of easing back down from orbit--something they were doing a good job of until last Friday when they got tape-bombed by the ECB LTRO payback news.  That put bond markets right back in defense mode, and the quick run-up was the "oh crap moment" when visions of worst-case scenarios ran through traders' minds where the following week might bring an unfriendly FOMC Announcement and an Unfriendly NFP.  That's the Friday highlighted on the chart where we moved up 10bps in a day, right back to January's previous defensive perch.

What we've experienced as peaks and valleys since then have been mostly fueled by structural tradeflow considerations with short covering bringing yields lower in fits and starts only to be sold by "fast money" accounts with "real money" not pushing back much until 10's moved over 2%.  The FOMC Announcement was economically bullish, but without increasing speculation of an early QE exit.  It allowed for some rotation out of stocks, back into bonds, releasing SOME of the defensive pressure built up in bond markets.  In the bigger picture, however, we've just been flat since then, with an uncommonly high amount of TWO-WAY volume.

Normally, high volume results in bigger directional movements, but movements have been quite contained since leveling-off post FOMC.  This suggests a stalemate, with each side of the equation well-represented and fighting fiercely for neutrality ahead of the week's final battle: today's NFP.

The good thing is that we've just discussed by bond markets have been in a defensive stance.  That hopefully means that a good deal of any upside surprise in NFP is priced in.  We'd imagine that 2.06 would be an extremely tough ceiling to break with all but a 250k+ print.  A downside surprise creates a much more slippery surface for yields.  If the "defensive stance" is real, then a bounce back to 1.92 happens quickly with any reasonable "miss" in the NFP headline.  

On a final note, regarding the Treasury-focused discussion on the MBS Commentary...  It's much easier to observe and comment on technical developments over time with a security that settles in 10yrs vs one that is never more than a month away from settlement.  That makes 10yr yields much less pitchy than MBS prices when we look at time frames that come anywhere close to monthly MBS settlement.  Furthermore, MBS coupons come in and out of style as markets move higher and lower.  The liquidity changes over time mean that December and January's average prices in the 104's would be compared in the long run to another MBS coupon's average price in the 102's.  These sorts of constraints make for an imperfect technical analysis subject over time.  That said, examining prevalent price levels can be useful to show where MBS investors have come into and out of the market.  The most salient pivot points for Friday are at 103-00 on the weak side and 103-16 on the strong side in Fannie 3.0s.