ISM's report on the non-manufacturing sector showed PMI at 55.4 in March, improved from the 53.3 print in February and better than consensus estimates of 54.0.  This is the highest read since May 2006. The Business Activity index registered a much better than anticipated read of 60.0 vs. 54.8 in February. This is the best print since April 2006.  The New Orders Index was at its highest level recorded since August 2005 at 62.3. Compare that to 55.0 in February. A number above 50 indicates growth while a number below means the sector is contracting.

At the same time, the National Association of Realtors released the Pending Sales of Existing Homes report. In February, the Pending Home Sales index rose 8.2 percent to 97.6. This beat estimates for a flat month.  All regions but the South saw month over month improvements.

This data set serves as a compliment to the Employment Situation Report...another round of ammo for the stock bulls. Not so good for bonds though...

Afterward, the S&P hit new 2010 highs at 1,187 (my target is 1,200) and the 10 year Treasury note yield continued its move toward 4.00%, rising from 3.95 to 3.985%. THIS IS ALL OCCURRING WITH FIRST TEAM TRADERS STILL OUT OF THE OFFICE.

The FN 4.5 is unfortunately holding near the weakest price levels of the day and year, currently -0-07 at 99-08 yielding 4.597%. The secondary market current coupon is 4.637%. The current coupon yield is 65.1 basis points over the 10yr TSY note and 62.1 basis points over the 10yr swap.  The FN 4.5 has set a new 2010 price low.  THIS IS ALL OCCURRING IN VERY LOW TRADING VOLUME.

Did I mention this is all occurring without a full roster on trading desks today? First team decision makers are still out for Easter/Passover. This leaves understudies at the helm with strict instructions to let the market go where it pleases aka don't try to catch a falling knife. Bids wanted....

With benchmark yields still rising and the yield curve still steepening (it's really randomly meandering as opposed to trending)...I am waiting for mortgage servicers to start selling "rate sheet influential" MBS paper. We call this duration shedding. This would essentially signal the end of the first phase of the post-Fed MBS purchase program "cleansing process". After this occurs I would expect to see more  MBS accounts testing the "bargain buying" waters. That shouldn't happen today and might not occur until later in the week when  $82 billion TSY supply is taken down.

Those living by our "PLAY THE RANGE UNTIL THE RANGE PLAYS YOU" motto are probably feeling pretty darn nervous at the moment. I understand your sentiment. Before you break into a cold sweat and start to panic, remember that a 10yr note test of 4.00% has always been in the cards and the 3.57 to 3.85 range breakdown has played out in a low volume, quarter-end (Japanese year-end)  trading environment (remember the end of 2009?). Making matters worse for already rising rate levels has been more better than expected econ data and a 5-week bull run in equities. This has some folks talking about a Fed Funds rate hike before the end of 2010. While this does not have a direct influence over the "rate sheet influential" end of the  yield curve, rising rates in the short end do indirectly push 10yr yield levels higher. So, we would greatly benefit from a 2yr note yield rally back below the 1.00% handle. Plus, oil has been on a tear...fueling the fire of inflation hawks. Overall...the bond market has not been getting originator friendly signals from the macro-environment. But should we be expecting structurally sustainable improvement in aggregate demand because of it? I find that hard to believe, the labor market is by no means "strong".  Expect 10s to hit 4.00% before traders get long and test the waters of  bargain buying recovery rally.

It's always darkest before dawn....