As we discussed yesterday morning, the afternoon's 3yr Treasury auction stood a chance to garner the first significant reaction to a 2 or 3yr auction in several years.  Surprisingly enough, it did just that, but in a strange way.  The auction was weak, which can either suggest "bond market weakness" in general, or more subtlly suggest "bond market preference shifting toward longer duration."  When all was said and done, markets traded with both of those possibilities in mind, first moving universally weaker--even in MBS and 10's--but then with the long end rallying relative to the short end. 

Headlines out of the ECB and gyrations in Forex may be more in play than the hopeful notion that the yield curve is setting up for a moderately epic (if brief) round of flattening, but either way, we'll know a lot more about that after today's 10yr Auction (and even more after tomorrow's 30yr).  10's are RIGHT on the edge of a few different trends, ready to go either way (and as far as bond bulls are concerned, greatly in need of a break back below 2.18 to set up in better position for next week's FOMC events.

MBS are similarly at the exteme end of the recent trading range, but thankfully can still say they did not make a new low yesterday even after the roll (from June to July coupon pricing) was factored in.  Even if there had been a break lower on this chart, it wouldn't have spoken to any organic weakness in MBS, but from a long term technical standpoint, it's better than nothing.