As has been the case since liquidity began to dry up in earnest two weeks ago...the bond market has made a directional move after the Fed completed their latest QEII open market operation. 

Profit takers and short sellers are making their presence known following the Fed's latest POMO in the long end of the yield curve. Flows have gone negative in a hurry and the 2s.10s curve has steepened aggressively. Again, trading volumes are very low and this behavior is exaggerated by a lack of liquidity, unfortunately that offers little concession to lenders. Rate sheet influential MBS prices are falling...and fast.

The benchmark 10 year TSY note yield is now -9/32 at 93-24 yielding 3.373%. This is almost 8bps above the morning yield lows, most of which hit screens in one sharp spike over the past few minutes. The FNCL 4.5 is -4/32 at 101-27. This is 7/32 below the morning price highs which gives secondary enough cause to reprice for the worse.

A few observations for you...

The fact that the Fed posted their QEII purchasing schedule makes it much easier for market participants to day trade around the event. Set up a tactical long into the POMO, book profits during and after, get short, wait it out for the next POMO. Rinse and repeat. Year end trading conditions make this sort of strategery even easier.

Also...it is painfully evident how defensive the market becomes when 10s cross through 3.31%. It's like buyers simply don't care to chase any rallies...