Bond markets began the day on the back foot, losing ground right from the overnight session.  The weakness didn't pick up noticeable steam until the onset of domestic trading where a palpable absence of Friday's positive factors made for a lack of buyers. 

The end of May had been buoyed by strong buying in bond markets from money managers who are required to adjust portfolios to match the duration of bond indices.  So-called "index extensions" provided a constant source of moderate strength through Friday and were complimented by demand from short-covering (traders who had bet on higher rates being forced to buy in order to cover their 'short' bet).

With those two benefactors understandably absent this morning, bonds haven't been shy about moving in the other direction.  The only saving grace was the weaker-than-expected ISM Manufacturing report that came out at 10am.  In a somewhat cruel twist of fate, rumors circulated and the ISM quickly confirmed that it had used the wrong seasonal adjustment factors in today's report and the correct numbers made for a STRONGER-than-expected reading.

With bonds having improved when they thought ISM was weaker, they naturally erased those gains when ISM "became" stronger.  Even before that though (and before rumors began circulating), Treasuries and MBS had already bounced back toward unchanged levels, hinting at a certain measure of innate, preexisting weakness, independent of the ISM surprise. 

All this having been said, it's a reasonable assumption that bonds are just flushing out the portion of last week's strength that may have been a bit over the top.  To that end, 10yr yields are now back in the range that preceded the last surprise rally on Wednesday and Thursday.  They're more likely to feel a stronger pull of gravity here.  It's the same story for MBS upon Fannie 3.5s reaching the low 102-20's.

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
98-16 : -0-12
FNMA 3.5
102-21 : -0-09
FNMA 4.0
105-21 : -0-07
2 YR
0.3987 : +0.0277
10 YR
2.5339 : +0.0769
30 YR
3.3799 : +0.0659
Pricing as of 6/2/14 12:02PMEST

Morning Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
11:44AM  :  ALERT ISSUED: Negative Reprice Risk Increasing yet Again after ISM Data Faux Pas
11:29AM  :  ALERT ISSUED: Negative Reprice Risk Increasing as MBS Push into New Lows
10:51AM  :  Post-Data Improvement Fails to Hold; Back to Weakest Levels
10:06AM  :  Bouncing Back After Weak ISM Manufacturing Data
9:25AM  :  Bond Markets Weaker as Month-End Trades are Unwound

Live Chat Featured Comments
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Jeff Anderson  :  "GM, all. Yeah, Thur and Fri May have some Sort of impact."
Sung Kim  :  "We will see if the NFP ramp up unfolds today"
Jeff Anderson  :  "Might be the ECB ramp up in disguise."
Ted Rood  :  "Looks like we're pivoting the wrong way from 2.47! Yikes!"
Hugh W. Page  :  "MG hits the nail on the head. Big risk this week that ECB disappoints. Maybe short covering in TYS is over and any econ data that is not supportive for us this week will not be taken well. Don't like the risk/reward tradeoff. Lock em up ....."
Christopher Stevens  :  "Franklin dropped minimum FICO from 640 to 620 on CONV loans and Suntrust went from 660 to 640. Credit box is opening a little bit."
Christopher Stevens  :  "good article in this weeks Barron s about the 10YR yield. "CRT Capital bond strategist David Ader produced a report citing 11 reasons why rates fell so sharply, ranging from the German employment data to bond mutual fund flows to short-positioning in the Treasury market to expectations of a Fed rate hike. Ader ended his 11-point treatise with the following conclusion: "I personally welcome other thoughts on all this because despite items 1 to 11, I'm as confused as everyone else.""
Christopher Stevens  :  ""Similarly, Peter Tchir of Brean Capital devised a three-part rating system by which he compared seven possible reasons for falling Treasury yields: scarcity of bonds, investors chasing yield, European Central Bank expectations, a Treasury short squeeze, underweight positions in bonds, poor market liquidity, and lackluster economic growth. Tchir concludes that poor U.S. growth is the real culprit. "Concerns about the economy are real and spurred Treasury buying and are likely to be persistent," Tchir writes.""
Matthew Graham  :  "Good stuff CS. To Tchir's point about where the focus truly lies, I'd only add the following: That's not to say he's absolutely wrong, just that market participants see this, as well as the timing of the two major bouts of pain-trading that came after it (which aligned with ECB comments) and conclude the ECB is the gorilla in the room."