We'll focus on 10yr notes for a moment in order to benchmark the broader bond market. Earlier, 10's had been battling very short term resistance. After jumping to the highest yields of the week this morning, they knocked on the door to get back into yesterday's yields and were firmly denied for a short time. The logical thing finally happened on the Consumer Sentiment data and 10's finally broke that resistance. But after the last leg of mini-rallying, 10's find themselves bouncing on some LONG term resistance at a trendline that goes back to 2007/2008. In terms of history repeating itself, 10's bounce on this same trendline at the same point in the historical chart that lines up with current trading. If this isn't making sense, just think of "fractals." As history has repeated itself , sections of current trading and past trading could be snipped out of charts and if laid next to or on top of each other would look remarkably similar. Long story short, the big bounce in 2008 that matches up with the big bounce today is on the same trendline. Hope that makes sense. Ask for clarification if it doesn't and we'll dig into it in more detail. Moving on though... the implication is that we have some ongoing challenges this morning. We got through some previous resistance, but the market is telling us it won't be easy to rally down past 2.92 without some more guidance. Maybe that will come from Euro stress test results, or maybe from unscheduled headlines. Unless it happens, 4.0's are probably not heading much higher than 100-29, meaning that pricing isn't going to be improving much, if at all on first rate sheets. We'd need to break 100-29 to see reprices for the better become more than just an outside possibility.

To use the technical term: "UGH...." Both MBS and Treasuries are looking plagued by some sort of inherent bearish bias this AM. None of the data has been particularly unfriendly and the most recent data--a nauseatingly bad Consumer Sentiment report--is not producing the kind of results one might expect. After rallying briefly, MBS and 10yr Treasuries both failed to break meaningfully back into yesterday's range. Fannie 4.0's are a bit better than they were though... Now a tick better on the day at 100-24. And the picture may soon improve for benchmark Treasuries as stocks look like they might capitulate to the weakness suggested by Consumer Sentiment. S&P's shot down 5-6 points in the past 5 minutes and bounced a point or two back up. If we could get a bit more of that directional sell-off vibe from stocks, it looks like the stock-lever has been connected enough that that would help 10yr benchmarks break the 2.95 pivot meaningfully. 10's are currently right on the edge at 2.948. Aforementioned "meaningful break" would almost certainly coincide with further MBS gains.

(Reuters) - U.S. consumer sentiment deteriorated in early July to the lowest level since March 2009 on increasing pessimism over falling income and rising unemployment, a survey released on Friday showed. Confidence in government economic policies also curdled, the Thomson Reuters/University of Michigan survey showed. U.S. lawmakers are wrangling over a budget deal that would allow the government to raise the debt ceiling -- needed so the United States can fund its obligations next month. The preliminary reading for the consumer sentiment index dropped to 63.8 in July from 71.5 the month before, falling far short of expectations of an increase to 72.5, according to a Reuters poll of economists. The survey's barometer of current economic conditions fell to 76.3, the lowest since November 2009, from 82.0. The gauge of consumer expectations was also at its lowest since March 2009, tumbling to 55.8 from 64.8. "Whenever the Expectations Index has been this low in the past, the economy has been in recession," survey director Richard Curtin said in a statement. "Nonetheless, one month's data is insufficient to signal a renewed downturn, particularly if a last-minute agreement on the debt ceiling results in a partial restoration of confidence." Overall, the data suggests real consumer spending in the second half of the year may be barely higher than the first half, the survey said. The proportion of consumers that rated government economic policies as poor rose to 52 percent in early July, up from 40 percent in June. The inflation outlook improved with the survey's one-year inflation expectation easing to 3.4 percent from 3.8. The five-to-10-year inflation outlook was at 2.8 percent from 3.0 percent. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

(Reuters) - U.S. industrial output rose modestly in June on strength in mining and utilities, but manufacturing production stagnated in part due to supply disruptions in the auto sector following a Japanese earthquake. Industrial production climbed 0.2 percent last month, and May's slight gain was revised down to a 0.1 percent decline. Economists polled by Reuters had been looking for a 0.3 percent increase. Manufacturing stalled, however, according to the Federal Reserve data released on Friday. Taken as a whole, second quarter factory activity was the slowest for any quarter since the recession ended in the summer of 2009. Capacity utilization, which gauges firms' performance relative to their full potential, was steady at 76.7 percent. That was up 2.2 percentage points from a year earlier but 3.7 percentage points below the average from 1972 to 2010. (Reporting by Pedro Nicolaci da Costa; Editing by Neil Stempleman)

Following the 8:30am econ data, MBS and Treasuries traded uncharacteristically sideways at first but MBS have since fallen to match their lowest levels of the past two days. That may sound more alarming than it actually is considering this is merely last night's latest mark, 100-22+ in Fannie 4.0's. Perhaps actually alarming is a 10 yr Note that is at it's highest yields of the week, breaking out of the short term range marked by 2.95 that has contained all trading since Monday morning. If the last two pieces of economic data don't do something to reverse that trend, MBS stand a good change to dip into negative territory as well.

The Labor Department reports the Consumer Price Index fell 0.2 pct in June. Economists polled by Reuters expected the headline drop to be -0.1 pct. But excluding more volatile food and energy components, prices actually rose 0.3 pct versus an expectation of +0.2 pct (the +0.3 pct figure is rounded up from an actual +0.2545). Year over year, both the headline index and the reading that excludes food and energy were unchanged from last month's year over year readings (+3.6 pct headline and +1.6 pct core).

(Reuters) - A gauge of manufacturing in New York State showed the sector unexpectedly contracted for the second month in a row as new orders worsened, the New York Federal Reserve said in a report on Friday. The pace of decline did moderate somewhat in July from the month before, with the New York Fed's "Empire State" general business conditions index rising to minus 3.76 from minus 7.79 in June. However, it was still weaker than expected, since economists polled by Reuters had expected a reading of 4.50. The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions. In June the regional index had tumbled sharply, contracting for the first time since November 2010, but the larger national report for the month showed a modest uptick in the pace of growth. New orders fell to minus 5.45 from minus 3.61, while shipments improved to positive 2.22 from minus 8.02. Employment gauges worsened with the index for the number of employees at its lowest level since December 2010, falling to 1.11 from 10.20, and the average employee workweek index tumbling to minus 15.56 from minus 2.04. The outlook for the months to come was less gloomy with the index of business conditions six months ahead rising to 32.22 from 22.45. However, the level of optimism was well below levels seen earlier this year, the report said. (Reporting by Leah Schnurr, Editing by Chizu Nomiyama)

(WSJ) - A backup plan to cut the federal deficit and keep the U.S. government from default gained momentum Thursday even as President Barack Obama and congressional leaders paused their negotiations to determine if they can reach a deal. Ratcheting higher the pressure on Washington to strike a deal, Standard & Poor's for the first time said there was a 50% chance it would downgrade its rating of long-term U.S. debt within three months because the chances of default were "increasing" and the political debate about deficit reduction and the debt ceiling had "only become more entangled." The U.S. has had a AAA bond-rating from S&P for 70 years. The so-called Plan B is taking shape in quiet discussions between Senate Majority Leader Harry Reid (D., Nev.) and Republican leader Mitch McConnell (R., Ky.), away from unhappy House Republicans who don't favor the approach.

Up until now the bond market has generally ignored debt ceiling headlines. There's been too much noise surrounding the entire situation and no one really thinks the U.S. will really default on its debt obligations. But that's not what happened yesterday. The long end of the yield curve finally reacted negatively to bond bearish debt ceiling headlines. This reaction could be a one-off event based on trading technicals and a general feeling of boredom in the air. The 10-yr note did bounce AGGRESSIVELY at a key technical resistance level (2.90%) after House Speaker John Boehner shared bond bearish comments. That makes a tech-based reversal a valid explanation. OR. This could be the start of something new. Bonds are looking technically overbought and the economy has yet to confirm a continued slowdown is in progress. That means there is little new motivation for a sustained break of said 2.90% resistance. With 10s out of room to rally, perhaps the market's attention is finally shifting toward domestic politics and the debt-ceiling???? The potential for ongoing EU tapebombs and the strength of this week's auction cycle, especially the long-bond, paint a totally different story though. One that is more supportive of lower mortgage rates and a flatter curve. But investor boredom combined with technical sell signals certainly make one wonder what direction we're headed next. Phew. The best thing for this market right now seems to be the weekend. There's just too much debree floating in the water to make any broad sweeping assumptions about strategic directionality. Stay nimble...