The Treasury is set to re-open the November 2019 issue 3.375% coupon bearing 10 year TSY note. $21 billion more will be offered. The results of the auction will be released at the 1pm deadline.

Since the NFP data was not enough to help rates breakout of the 3.75 - 3.84 range and yesterday's 3 year note auction was not indicative of the market's true sentiment towards "rate sheet influential" benchmark, it should be noted that today is a somewhat important event for the mortgage market. We get to put our "relief rally" theory to the test.

Ahead of the auction, 10s are trading higher in yield...but that is more a function of strong support at 3.71% and the general dearth of economic data today. Not much reason to be a buyer ahead of $21 billion in supply. Check it out...

MBS prices have also cheapened up a bit more as well. The FN 4.0 is -0-07 at 97-10 yielding 4.256% and the FN 4.5 is -0-05 at 100-11 yielding 4.469%. The secondary market current coupon is 4.449%.

Over the past two days we've witnessed a considerable rally in the "rate sheet influential" side of the debt market, 10s broke 3.75 resistance on short covering and a decent follow up bid. The extra volume was supportive of a continued move lower in rates . If you look at this auction as an opportunity to do some "bargain buying"...it shouldnt go  well...but we would really need the support of indirect and direct bidders for that to happen.

If you think rates reflect a shift in economic outlooks and inflationary expectations....this auction might not go so well, especially when you consider that the recent range breakout erased a portion of the street's (dealer's) auction supply concession. If this is the case, expect a negative knee jerk reaction and reprices for the worse from lenders.

My gut is for the high yield to be a bit higher than expected and an initial knee jerk reaction backup in yields, which would then be followed by a round of "buying on the dips" as dealers distribute the issuance. If dealers are not forced to take down a bigger than expected helping of 10s, then we could see a good reaction after the auction.

The above is expected knee jerk reactions...after this week's auction supply is absorbed, I anticipate "rate sheet influential" benchmarks will look to test the waters of a recovery rally. I guess that's what matters most....