Yesterday

- Uneventful, low-volume, sideways, uninspired

- Despite all that boring stuff, MBS made moderate gains

- Treasuries gained slightly, but fairly sideways overall since Friday

- Technical picture improved

Today

- Slightly more volume should show up, but there's not much more data

- Wholesale Inventories is the only AM data.  Not that important...

- Treasury Auction cycle begins with 3yr Notes at 1pm

- Still feeling out the balance between short covering and organic support

- A few other considerations in the mortgage world

Strategy

After yesterday's lackluster, if positive, session, today holds the promise of slightly more participation.  Not only are Tuesdays generally a better bet for such things versus Mondays, but we also have a slightly fuller plate.  Although the economic data isn't anything special, at least we have some this morning, in the form of Wholesale Inventories at 10am.  The 3yr Treasury Note Auction wraps up at 1pm as well, and could cause a small amount of movement.

A meaningful part of the paradoxical strength in Treasuries over the past 2 sessions has been chalked up to short-covering.  That happens when traders take out a short position, which is a bet that rates will go higher.  There could be open short positions that are many months old and some that are just a few days old, and everywhere in between.  The quick pop to 2.92+ in 10yr yields on Friday was very likely trigger to book profits on those short positions--whether automatic or enacted by human touch. 

Man and machine alike have no incentive to close the short position right when it hits a certain level though.  The standard operating procedure is to have a "trailing stop"--a point to which rates would have to fall after making a certain new high before the stop is triggered.  When a short position's stop is triggered, the position is closed by BUYING Treasuries (because the original short position is the "sale" of treasuries, so the short is covered via buying).  That buy-side demand adds to bond market strength just like any other buy-side demand. 

After all that, market participants set to the task of filtering out how much of the recent positivity is due to the misleading force of short-covering!  In this case, we can safely assume that it has helped.  Combine that with the fact that 10yr Treasuries are only a few bps lower than their pre-NFP highs, and we're left with a market that has gone sideways into and out of NFP in terms of organic bond market sentiment.  Accounts are thinking more about making it to the end of the year safely and with minimal headache as opposed to trying to kill it with speculative moon-shooting trades.  The last hurdle is next week's FOMC meeting/announcement.  The massive amount of sideways momentum here suggests that we're about to hop off this ledge on one side or the other and approach FOMC from that angle, likely heading back toward current levels by next week, unless Retail Sales is potent enough to nudge us off that course.

For all that talk on Treasuries, MBS have their own reasons for paradoxical positivity, including but not limited to yesterday's roll.  As opposed to gaining 3 ticks yesterday, MBS will now look like they lost 7.  This greatly lessens the apparent gap that had been forming between MBS and Treasuries from a "price vs price" standpoint.  On a final note, perhaps the most interesting mortgage-specific consideration of the day is this:  Nitty Gritty Details on GSE's Expected Fee Hike and State-Level Changes. 

Charts

10yr yields and technicals.  Yes, MBS had been diverging quite a bit, but will be better-connected again now after the roll (point being, 10yr technicals are relevant to broad interest rate momentum, and MBS aren't so tuned out right now as to not be following along).