Scattered reprices for the better were reported today. Rate sheets are about as strong as they've been in a month. Price action in the bond market was a little odd though....

S&P futures ended the session +0.75% at 1340.75. Oddly enough, the benchmark 10-year note also enjoyed a nice little rally. 10s are going out +15/32 at 102-20 yielding 3.309%.This is the lowest 10yr yields have been in over a month.

Although MBS lagged TSYs badly today, the rally in the long-end of the curve still led FNCL 4.5 prices solidly through 102-10 resistance. "Rate sheet influential" MBS prices haven't been this high in over a month. Check it out...we're on a seven day #WINNING streak. Plus prices have rallied in nine of the last 11 trading sessions.

(MY CURRENT COUPON 3PM MARKS: -1.7bps to 4.086%. +77bps/10yrTSY vs. +74bps/10yrTSY yesterday at 3pm. +72bps/10yrIRS vs. +68bps/10yrIRS yesterday at 3pm. MBS clearly wider. Clearly outperformed.)

So stocks and bonds both rallied big today. Why did rates disconnect from the stock lever?

I love it when we're able to copy and paste previously published content. It saves time and energy. It also reinforces points and observations we've already made. Today is one of those days.....

From:  MBS Benefit from Lack of Lock Volume. TSY Short Covering Seen (4/20/2011)

Position Squaring! Investors are getting flat ahead of next week's high risk FOMC meeting. We discussed this behavior in the day ahead. "It looks like we're gonna find out just how nervous the TSY short-base is at these lower dollar prices. This is either an opportunity to cover at lower dollar prices or add new shorts. Position squaring seems like a better idea ahead of next week's FOMC meeting!Cash looks like the smart spot to be in"

That is indeed the case today. Trading volume is low. Liquidity is lacking and short positions are being covered. Check out my trade flows screen below. Notice prices going up and money flows going down? That means money is exiting the market. When prices are rising and volume is low and open interest is falling...PRICE ACTION = SHORT COVERING

The chart we used that day looks a lot similar to today's money flow chart....

Plain and Simple: Short covering in benchmark Treasuries was the force behind today's rates rally.

SHORT COVERING: Purchasing securities in order to close an open short position. This is done by buying the same type and number of securities that were sold short. Most often, traders cover their shorts whenever they speculate that the securities will rise. In order to make a profit, a short seller must cover the shorts by purchasing the security below the original selling price. -Investopedia

Short covering rallies aren't our favorite because they don't necessarily speak to organic strength in bonds. But they do provide a hint of positivity. Short covering implies traders are nervous about their bearish positions. Short covering into sell-offs implies bearish traders are defensive of their profits. They are nervous rates won't move any higher. Short covering before a big event like the release of the FOMC Statement at 12:30 tomorrow followed by Ben Bernanke's press conference at 2:15pm....that tells us the bearish traders are nervous that the Fed will downgrade its outlook and maintain a long-term dovish perspective on monetary policy (low interest rates). Either way...bearish traders are nervous about the outcome of the FOMC meeting tomorrow. We'll call it "forced buying".

From a big picture perspective....

Our long term outlook is that rates will take another run lower in the 2nd half of the year, just like they did last year.  Not too many folks agree with us though. The average outlook among organized smart folks puts 10s around 3.70% this summer.

That makes us feel alone in our call for another leg lower in rates (repeating history from last year)...from that point of view, now seems like a great time to lock your loans if you haven't already. Especially since we know it's gonna take a sustained rally in the bond market to break the current Best Ex barrier we've been talking so much about in 2011.We expanded on that barrier in THIS POST.