The bond market has effectively been rallying since the 10th of February. There are two ways to look at that rally, as either CORRECTIVELY BEARISH or TREND CHANGING BULLISH. 

We had a chance today to see if evidence toward the latter could be further accumulated, but those hopes were crushed by a sell-off.  When looking at a broader view of the situation,  it can be viewed as a logical division  between a "then" and "now"   range. And so it is, we find ourselves heading into tomorrow's Employment Situation Report sitting squarely on the middle the fence. Below is graph illustrating the neutrality of bond market techs. 

Rate Techs: Neutrality Found Just Before High-Risk Event

It's hard to tell exactly where the breaking point is in terms of an actual payrolls number and unemployment rate insofar as which combination of those two metrics would lead bonds to generally rally versus generally weaken, but it's probably safe to say that if the report is better than expected that the market is telling us it's ready to move BACK INTO THE PREVIOUS RANGE OF 3.56 to 3.70 in 10yr treasury yields!  This can only be a bad thing for MBS, regardless of how much spreads might tighten into the sell-off.  We'd be looking at 5.25 best-execution in short order.

On the other side of the coin, while we're not as likely to see the unemployment rate tick back up to it's previous range, if we can manage to come in under the consensus for payrolls, we could continue to see the support around 3.56 that we saw today.  In that event we'd be showing you that same long term 10 year note chart. You know the one that tells us we're due to repeat history.

The labor market is in the Fed's focus at the moment as the lynchpin that allows ongoing doubt over the sustainability of recovery.  When and if signs begin definitively building that labor markets are recovering, monetary policy shifts won't be far behind, and it's not out of character for bond traders to infer such things and price their liklihood into current rates.  It could get very ugly very quickly.  We're on the defensive to be sure. Especially with the ECB signalling a rate hike in the not so distant future.

Here's the NFP Preview from Reuters:

FACTORS TO WATCH
U.S. nonfarm payrolls probably soared in February after being held down by extreme winter weather that gripped large parts of the country in January. Employment is expected to have increased by 185,000, which would be the largest gain in almost a year and the clearest signal yet that a self-sustaining economic recovery is taking root.

But payrolls in recent months have tended to fall far short of economists' expectations, even though independent labor market surveys have largely pointed to momentum in the pace of job creation.

There are concerns that the government may be missing growth coming from new businesses. Labor Department chief economist Betsey Stevenson last month acknowledged the count was likely falling short, just as faulty estimates of how many companies were created or destroyed led to an understatement of job losses during the recession.

Factors in favor of a strong February payrolls figure include first-time applications for state unemployment benefits, which saw hefty declines during the month. In addition, consumer confidence surveys paint a picture of an improving labor market.

A survey of national factory activity on Tuesday showed a gauge of manufacturing employment scaled a 38-year high in February.

Though parts of the country such as the Midwest suffered severe snowstorms, conditions eased during the payrolls survey week.

Despite the expected jump in payrolls, the unemployment rate is seen ticking up to 9.1 percent. The jobless rate is derived from a separate survey of households, which in January showed a nearly 600,000 increase in jobs.

The unemployment rate has dropped 0.8 of a percentage point since November, the biggest two-month decline since 1958. It is being closely watched by the Federal Reserve for signs the economic recovery is on a self-sustaining path.

The path of unemployment could well determine the timing of the U.S. central bank's first interest rate hike since cutting overnight lending rates to near zero in December 2008. According to the Fed's projections, the economy's natural unemployment rate is between 5 percent and 6 percent.

Fed Chairman Ben Bernanke has said the central bank would need to start withdrawing some of its massive monetary stimulus before the jobless rate drops to that level. The Fed is expected to complete it's $600 billion government bond-buying program, which ends in June, even if employment shows strong gains in February and the months after.

As in previous months, the private sector is expected to account for all the anticipated job gains in February. Private payrolls likely jumped 190,000 after growing 50,000 in January, spurred largely by the services sector.

Private services payroll growth took a step back in January as employment for couriers and messengers declined sharply. Temporary hiring also dropped in January.

Employment in the goods-producing industries should see a weather related bounce, with construction recouping some of the 32,000 jobs lost in January. Strong gains are expected in manufacturing, a sector that is powering the recovery.

Government payrolls probably contracted for a fourth straight month, pulled down by state and local governments, which are under heavy budgetary pressures.

The average work week is expected to edge up after severe weather shortened working hours. Average hourly earnings are expected to increase at a slower pace than in January.

MARKET IMPACT
Nonfarm payrolls will vie for investors' attention with Libya, where political unrest has pushed crude oil prices above $100 a barrel and ignited fears of inflation and slower growth.  A stronger employment report, which would be fresh confirmation of a strengthening recovery, could trigger a government bond sell-off and push yields up. It would also be a boost for the dollar and stocks, which have suffered on concerns that the high oil prices could hobble the recovery.