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After Friday's paradoxical sell-off in the bond market, we come to work on Monday morning to find a 4.0 MBS coupon that has recovered all of its losses and a treasury market that has done almost the same.  This is generally being chalked up to a couple notable pieces of news this morning.  A Bernanke interview on 60 minutes aired yesterday in which the Chairman highlighted the fact that "we're not very far from the level where the economy is not self-sustaining... It's very close to the border. It takes about 2.5 percent growth just to keep unemployment stable that's about what we're getting."  In response to these concerns Bernanke said another round of QE was "certainly possible". Combine that with the lingering memory of that much-weaker-than expected employment report, and wider sovereign CDS spreads this morning, and U.S. bonds have found some levity.

The unspoken danger danger in both markets is that this correction merely brings each back in line with its previously weakest levels from mid month.  That's an important pivot point to cross this week lest a reasonably pertitent technical indicator be given to the effect of: "once floor, now ceiling." For MBS, those mid-late month lows were somewhere around 101-00 and slightly higher in a few cases.

Treasuries are in even more of a run-down as the triple top in yields near the 3.03 level provides a bit of a bullish support signal versus the 2.95-2.96-ish level that has (mostly) been THE important support level of November.  It almost seems that 2.96 was good enough for Novemeber, but yields would prefer not to be lower than that in December.  Then again, they haven't wanted to be higher than 3.03.  Hence the "run-down."

Stocks are also fighting a technical battle that relies on previous levels for guidance.  But in this case, it's the battle to break through long term highs.  One might hope that with the weak NFP on Friday, combined with Bernanke comments and ongoing volatility around the Euro-zone sovereign debt situation that there is enough of a bearish taint to the overall economic outlook for stocks to hold off on that breakout and for bonds to hold out at recent support levels. 

Regarding a sustained interest rate rally, AQ shared these comments last Monday, they are still very pertinent to current market conditions...

From U.S. Rates Rally as Bailout Talks Shift Back to Spain and Portugal :

"Unfortunately while positive progress has been noted, the technical environment still favors the bears, so any interest rate rally attempts will likely be met with scattered barrages of selling pressure and profit taking as bullish TSY investors cautiously add new longs against a herd of fast$ short sellers. "

Plain and Simple: the move lower for mortgage rates, if it even occurs in 2010, is expected to be slow as investors remain hesitant to get too far ahead of broader market sentiment.