Contrary to some of the wholesale price pressures suggested by recent reports (like the ISM manufacturing "prices paid" component, which rose to the highest levels since 2011 last week), consumer-level inflation is declining faster than expected. Bonds have been concerned about the potential inflation impact of the Fed's monetary policy bazooka, not to mention the general economic recovery and stock market "wealth effect." But the data is not showing it--at least not for January. Today's 1.4% core CPI number is well short of the 2.0-2.5% range targeted by the Fed.
Bonds like that! The afternoon's 10yr Treasury auction will be the next big flashpoint for bonds, unless the CPI reaction steals the show. What does that mean, exactly? From time to time, the bond market will have been weak enough in the weeks leading up to a Treasury auction cycle that some sort of friendly bounce is all but a given. In those cases, when data or other events on the morning of the auction cause a bond rally, they can "steal the show" from the auction. Ultimately, an auction result that would have taken bonds from red to green in the afternoon has very little effect if morning events already provided the boost.
NOTE: charts look weak this morning despite strong MBS due to THE ROLL. Here's an updated chart that hopefully helps visualize the roll. The March coupon is on the right side of the chart. It has been trading for a few months, but just showed up on MBS Live today because February coupons hit their settlement date. The chart below overlays yesterday's MARCH coupon prices in green so you can see that MBS are stronger today if we're looking at apples vs apples.