Yields moved higher after the New Home Sales report, but failed to break through what we'd consider a nominal morning target around 3.40. It's possible that bonds will weaken further as the auction approaches, but this would only be a concessionary back-up and/or pre-FOMC concession. The trading that follows the FOMC announcement should be more informative. Perhaps the most striking aspect of this morning's action is the volume. It's as low as it has been in several days. 10's are currently at 3.3891 and FNCL 4.5's are at 102-02.

Single Family Sales rose to a 329k annual rate versus a 300k consensus (280k in November). This was up 17.5% (previously 5.5%). New home supply lowered to 6.9 months according to the current pace, vs. 8.4 months in Nov. The median Sales Price stood at $241,500, up 8.5% from DEC 2009 reading of $222,600. Overall for 2010, Single Family Home Sales were down to a record low of 321k vs 2009's total of 375k. .......... Bonds weakened marginally in response, but lo and behold, not outside the range that we mentioned a few minutes before the report.

From 1/21, we've seen the range of yields and prices move steadily wider, connoting increasing volatility ahead of this week's event risk. This morning's levels are essentially in the middle of trend. This leaves them room to ramble higher or lower while remaining in the confines of the short term trend. Naturally, from a pipeline management perspective, the HIGH end of the range is of more concern than rally potential. To that end, 3.40 and thereabouts would be a perfectly reasonable this morning, and well in bounds. The bottom line is not to worry if bonds battle back and forth with weakness this morning, because it's likely to happen, and given the circumstances, almost completely inconsequential.

10yr note yields are a few bps higher at 3.3812, after failing to get through 3.36. The highest level seen this morning was 3.3891. FNCL 4.5's are down a few ticks as well (currently 102-02). There's likely nothing more to this than the looming 5yr Auction and FOMC statement later today. Nothing about the next few hours should be interpreted with nearly as much significance as how the market trades following those 2 events.

So far, the weakest levels of the morning have been those seen at 8am. Since then, both treasuries and MBS have moderated directionally and stably. 10yr notes sit at 3.676 and FNCL 4.5's at 102-04. The movement thus far is not likely to affect prospects for reprices, but could help rate sheets stay stronger than they otherwise would be from lenders who have not released pricing yet this morning.

Considering the 3.32 -3.42 range yesterday, this AM's 3.37's in 10yr yields seems exceedingly palatable in the context of "high risk." FNCL 4.5's are 9 ticks down this morning at 102-02. MBA Applications are already out this morning (down 15.3% refi and down 8.7% purchase), and the next piece of scheduled data doesn't hit until 10am (New Home Sales). Beyond that, eyes will be on the auction at 1pm and to a much greater degree on the FOMC announcement shortly thereafter. Expect this to somewhat lessen the impact that outside-the-norm auction results might have on bond markets.