Morning trading was a linear and logical continuation of yesterday's rally. That's not to say bond markets were obviously destined to rally yesterday--simply that Jobless Claims got out of the way and there was a bit more room to run to technical boundaries.
Breaking those technical boundaries (specifically, 2.57 in 10yr yields) proved too tall an order today. The first bounce in the high 2.56's around 9am was a warning sign, but when the 10am Philly Fed Index came in stronger than expected, it was game over for any potential breakout attempts.
Both stocks and bonds underwent some sort of unified panicky reaction to Obama's podium tardiness with this afternoon's address on Iraq. They both subsequently calmed down, and MBS actually returned to the levels from just before the sell-off. It's not out of the question that the 30yr TIPS auction at 1pm created some of the weakness in bond markets, but unlike conventional auctions, there's no overt cause&effect when it comes to TIPS (because of their inherently contradictory nature--i.e. weak demand for inflation protection is positive for bonds, but weak demand for Treasuries in general is negative for bonds).
MBS ultimately ended just barely in negative territory on the day with Fannie 3.5s down 2 ticks at 102-06. 10yr yields held the recent range, heading out at 2.62.
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