Its been an interesting morning in the rates market.

After showing signs of a possible bounce yesterday afternoon, stocks have broken the 1087 support level. The S&P is -1.41% at 1082 at the moment. This was not done is high volume so nothing has been confirmed, however if traders are not looking to cover shorts and add new "bargain" positions...it could be a sign of a shift in sentiment in stocks.

Recently, the stock lever has been pretty influential over rates directionality. Not so much today. "Rate sheet influential" MBS coupons are trading in a tight sideways range. Positive price progress has failed to pick up momentum, regardless of weakness in stocks. The FN 4.0 is currently -0-04 at 97-17 and the FN 4.5 is -0-04 at 100-20.

The benchmark 3.375 coupon bearing 10year TSY note has led the way for the above discussed sideways grind to the right. 10s have failed to break 3.65% resistance, but the range is narrowing ahead of the pending $32 billion 7 year note offering.

So why are rates ignoring the stock lever? I think its mostly a function of traders making room for more debt, specifically the 7 year note issuance. After 2s and 5s sold off yesterday, which flattened the yield curve considerably, the curve is moving steeper this morning. With that in mind it is  safe to assume traders are unwinding "flattener" strategies after the FOMC meeting indicated rates will remain low for "an extended period". On top of that I might throw in a bit of Bernank renomination nervousness.

Plain and Simple: rates are not benefiting from the stock lever because of three reasons. Auction concession + unwind of FOMC flatteners + Bernanke uncertainty.

My outlook for rates after the auction results are released: The recent relief rally doesnt appear to be completely exhausted. Fundamentals are supportive of a continued "FLIGHT TO SAFETY" bid in TSYs. If all goes well and dealers are not forced to digest more debt than anticipated, I think we see 10s break 3.65 and at least retest 3.62 and 3.60.  Stay concious of the stock lever though, if equities bounce in volume, it could hurt our hopes for a post auction rates rally.