We are really hesitant to say this but....this TSY rally might just have legs. Here are some thoughts to consider before getting too excited....

First. The fact that this week's auctions went well (very) implies the market has a high demand for AAA rated assets.  Quarter end is however approaching, so this demand for liquid/high rated securities was expected as balance sheets are set up with "window dressings". But do indirect bidders have to clean up balance sheets? Hmmmmm.....

Second. Today's rally was in GOOD VOLUME...meaning more and more were jumping onto the rally as buyers gained control. This implies yesterday's post FOMC selloff actually helped us today! Why? Because it forced short positions to be covered which further fueled the rally. Furthermore, the added volume implies how much quarter end actually helped us here. As TSY rallied, the opportunity to re-allocate assets into "window dressing" type/risk free benchmark type assets (TSYs) grew...thus balance sheet managers who were looking for a safe spot to put cash jumped on the bandwagon..adding momentum to the rally.

Third. Technical indicators are...well they're indicating that the 10 yr TSY note yield is setting itself up for a retest of 3.50, which if you recall from late May was a huge psychological barrier to break. This third "positive" holds some weight but from a technical perspective the speed at which yields moved lower may add some skepticism to the strength of the rally...meaning some traders may not be convinced that the fundamentals suddenly changed their mind and shifted into risk averse assets all of a sudden (see quarter end talk above). Techs are more bullish but the added volume was for balance sheet reasons!

Basically I am saying that a short cover rally was fueled by asset managers "prettying up" balance sheets, which brought about fast money bandwagoners which further fueled the rally which brought about....profit taking? No. Didnt see much of that...too many buyers!

See why I say we are hesitant still? This is huge progress, but we will remain cautiously optimistic...(the auctions did go really well)

For now we will be happy with a close near/slightly under 3.54.

Here is the intraday chart of the 10 yr...15bps lower from the intraday highs. Exciting if this holds!

Now..that said. This MBS rally does not have the same legs. We were essentially dragged along by our "directional guidance" giver (the yield curve) who may have been artificially flattened (see 2s vs. 10s below) by a short covering/quarter end/fast money trade.  Volume in the MBS market was well below recent averages (which are low to begin with)...and yield spreads gapped out as TSYs rallied and MBS failed to keep up. 102-00 has proven to be a very firm resistance level of late...as that dollar price has been a key "get out while you can level"...do you think there is some coincidence about FN 5.0 stalling at 102-00?  The fact that the 5.0 lost steam here implies that MBS buyers may be hesitant about the extent to which TSYs rallied today . We think those account believe that buying (staying in the market) above this price level might be a huge risk...especially if TSYs correct and MBS investors have to "flee the burning building"...ooo that would be O so bad heading into quarter end. Remember what we said about quarter end and the  MBS market? Expect volume to be light and trade flows thin...a TSY correction would be a catastrophic event for "rate sheet influential" MBS (duration shedding...burning building!)....which is why accounts were not willing to ride the wave of optimism in TSYs...which is obvious by yield spreads gapping out! 

Here is the intraday...

Why did stocks rally? Cash going to work! Likely fast money/day traders jumping on a bandwagon.  I am not a stock analyst so I wont go too far into this but I bet that the EquityNewsDaily.com blog writer is feeling just as hesitant as we are about the extent to which market's rallied today.

The real question is what happens after June 30? Depends on economic data and headline news...LOTS COMING EARLY IN THE MONTH OF JULY...plus more Treasury auctions.

2s vs. 10s: 241bps (was 253bps at 10AM)

MBS QUOTES