MBS Pricing Snapshot

We've had mostly green on the screens this morning but aren't out of the woods yet. 10yr yields are just over 1bp lower than yesterday's 5pm levels and Fannie 3.0 MBS are a scant 3 ticks improved at 103-12. S&P futures slid steadily lower overnight and are about 6 points lower than 4pm levels yesterday.

The pace and significance of events quickened overnight and volume finally made it back to average. Bond markets found their key motivation in a well-subscribed German 10yr Bund Auction. Treasuries were already underperforming the EU Benchmark ahead of the auction, but the discrepancy widened afterward. US Treasuries merely flattened out while German Bunds Rallied 3-4 bps.

The Treasury underperformance here, despite the German Auction and a slew of other moderately supportive data and events overnight, underscores the challenges facing bond markets of late. Beginning with ECB Pres Mario Draghi's comments in London 2 and a half weeks ago (the "believe me, it will be enough!" stuff), volatility has spiked and yields are about 20bps higher.

Additionally, the weakness in 10's and MBS are showing signs of technical significance. There are many ways to chart this, but we included two very basic charts in this morning's "Day Ahead," which is linked below. You see the sort of upwardly sloped wedge forming in 10yr yields? We don't really like those, as they often connote two competing uptrends. One is worse than the other, but both are bad.

It's no guarantee that we continue to see an uptrend in yields, but clearly that's what we HAVE been seeing. We're interested to see the extent to which today's 10yr Auction (US Treasuries at 1pm) has an impact on bond markets. This morning's divergence from German Bunds may be a tacit suggestion of that possibility.

In other words, Treasuries are looking like they care about something other than Europe in the overnight session and that probably has at least something to do with 2 upcoming auctions today and tomorrow. MBS, for their part, are just following the leader for now.

* Productivity +1.6 vs +1.3 consensus
* Costs +1.7 pct vs +0.6 consensus
* Not the most meaningful piece of economic data in the current environment and having relatively little impact this morning. In the first 8 minutes, 10yr yields have moved just slightly higher and Fannie 3.0 MBS shed 2 ticks from 103-13 to 103-11. The movement and volume isn't big enough to attribute to this report (vs regular morning ups and downs)

Nonfarm business sector labor productivity increased at a 1.6 percent annual rate during the second quarter of 2012, the U.S. Bureau of Labor Statistics reported today. The increase in productivity reflects increases of 2.0 percent in output and 0.4 percent in hours worked. (All quarterly percent changes in this release are seasonally adjusted annual rates.) From the second quarter of 2011 to the second quarter of 2012, productivity increased 1.1 percent as output and hours worked rose 2.9 percent and 1.8 percent, respectively.