Most of the production MBS stack had been down nearly a full point this morning but have since battled back.  The 3.5 is currently down 21 ticks at 98-18 and the 4.0 is down 15 ticks at 101-21.  The 10yr note is 8 bps higher at 2.864.  The usual suspects continue to make it a tough road for the fixed-income pragmatist in the age of QE2, with "headlines" leading the charge.  Front page, center, in the WSJ this morning, is an article about republican lawmakers not just criticizing QE2, but actually calling for it to be unwound!

The trading seen thus far is merely the market trading that possibility (among other things of less consequence).  But even in the absence of this oh-so-joyous Monday morning tape-bomb, bonds have been struggling with some paradoxical bearishness.  It will likely turn out to be the case that this morning offered just another good opportunity for an over-long market to shorten up a bit more with an ideal scapegoat served up on a WSJ-lined platter.

What do I mean?  In short, the market is not trading reality, and the market knows it!  We'll be able to get more and more into that as you see more and more of me, but for now, one might almost say "it's a trader's world."  Case in point, last week, dealers' positions were the longest they'd been for almost two years!  Case closed... Mystery solved... 

Really aggressive long postions + an excuse to shorten them up (headlines, ireland...) =

And everywhere that Mary went, the lamb was sure to go...

So yeah...  that looks pretty ugly at first glance, but there's hope.  More or less, it's hope that the Fed continues to be, well....  for lack of a better term: RIGHT.  After all, Fed Funds rates in the last quarter of 2010 are very much in line with their 2008 forecast despite the rest of the world seeing rates much much higher.  If the auspices under which QE2 is now undertaken turn out to be the necessary evil that AQ mentioned here, then it wouldn't be too long before we see some stability taking hold in the recent tumult, or the "washing out" of some of that "longness" we just discussed.

Glimmers of hope for such things can be seen in the way the futures market is holding it's ground this morning:

Almost looks like a measured and calculated movement regardless of headlines...

Oh... and I suppose it should also mean something that MBS and bonds alike have continued to rally during the longer-than-it-used-to-be length of time that my rusty analytical fingers took to type this!  4.0's now down only 9 ticks on the day at 101-27.