The 3.59 10yr yield discussed recently has continued to hold through the 3pm close and now into after hours trading. FNCL 4.5's dipped as low as 101-02, but is now back to 101-04 following treasuries' supportive bounces. The 10yr is currently at 3.576. Volume was good today but not exceptional, almost perfectly in line with recent moving averages. Risks of reprices for the worse owing to the recent fall from the highs are minimal.

***FED'S FISHER SAYS SEES NO CIRCUMSTANCE WHERE HE WOULD SUPPORT FURTHER FED SUPPORT FOR ECONOMY BEYOND QE2 ***U.S. ECONOMY FLUSH WITH LIQUIDITY, FED HAS DONE ENOUGH ***SAYS DATA DOES NOT SUPPORT FEARS OF DEFLATION OR DOUBLE-DIP RECESSION ***SAYS SEES UPWARD PRESSURES ON PRICE STABILITY

*** FED'S EVANS SEES LITTLE INFLATIONARY PRESSURES UNTIL UNEMPLOYMENT FALLS TO 'SUSTAINABLE' RATE OF 5 PCT TO 5.5 PCT *** SAYS DISAGREES WITH VIEW THAT FED'S LATEST BOND-BUYING IS PUSHING UP COMMODITY PRICES GLOBALLY *** IF INFLATION ROSE BEYOND WHAT WAS ACCEPTABLE, WOULD WANT TO SHRINK BALANCE SHEET, TIGHTEN POLICY *** WHEN INFLATION STARTS TO RISE, WILL BE ASSOCIATED WITH BETTER ECONOMIC TIMES *** FED CAN 'TURN VERY QUICKLY' ON POLICY IF NEEDED, BUT DON'T EXPECT IT WILL NEED TO *** CONCERNED THAT INFLATION IS LOWER THAN FED'S TARGET, WILL BE MINDFUL OF UNWELCOME INFLATION PRESSURES

With 45 minutes left before the 3pm bond market close, a happy realization about today's yield movements and volumes is setting in: The highest volumes of the day pushed 10's under 3.59 and subsequently defended that level from further breakage. We haven't seen anything remotely close to this morning's volume that supported a sub 3.59 market. Even now, and even though volume remains quite low, 10yr yields refuse to go higher than 3.59. Pull up the 10yr chart (click on the 10yr in the "Treasury" section of the price grid" and draw a flat line with your mind's eye at 3.59. It's that simple really. Even that most recent test was not that harrying considering the low volume. The only risk would be for MBS to disconnect meaningfully from treasuries. If that happens, we'll alert you.

More and more lenders are adding themselves to the list of those who have repriced for the better as the recent gains in stocks and moderate rise in benchmark yields has failed to knock MBS of their perch near the highs of the day. FNCL 4.5's are at 101-05 with highs of the day seen at 101-07. CAUTION is in order however as 10's have finally returned to test a pivot line which currently lies on the 3.579 level. If we break much higher than that, MBS prices could come under pressure.

We just started seeing our first reprices for the better today. Then, following the 30yr TIPS Auction, there was a bit of a spike in 10yr yields, ostensibly approaching the diagonal pivot line (would be at roughly 3.579 if we were to see it tested now). But at 3.571 currently, we're not yet testing that line for support. We've seen almost a bp of movement in the few minutes since the auction. This isn't big news, and indeed getting a supportive turn before reaching the pivot leaves us in fine shape for now. We'll reassess that claim when and if the pivot is tested again. Meanwhile, MBS fell 2 ticks but have since regained one. No risks of reprices for the worse at this point.

U.S. SELLS $9 BLN INDEXED 30-YEAR BONDS AT HIGH YIELD 2.190 PCT, AWARDS 98.60 PCT OF BIDS AT HIGH *** ***BID-TO-COVER RATIO 2.54, NON-COMP BIDS $58.42 MLN *** PRIMARY DEALERS TAKE $3.68 BLN OF SALE, INDIRECT $4.94 BLN

Enough time has passed and enough progress made toward lower yields that we can consider a THIRD support bounce to be confirmed for 10yr Notes. The bounce comes on the diagonally moving pivot line that had contained the lower end of yields as they moved in a trend channel over the past two weeks. FNCL 4.5's are up a few more ticks at 101-07, which may be getting into the neighborhood of "reprice for the better" for some lenders. The next bullish signal for the bond market would require 10's to break 3.554 and hold that for 5 minutes or more. 3.559 has been the resistance level thus far in the shortest of terms.

Using the 10yr note as a benchmark, it looked as if the bond market would face a serious challenge in the past half hour. Yields had risen from their lowest levels and were approaching the diagonal trendline that had marked the lower end of the recent trend channel (with today's breakout, that trendline is now a pivot point, albeit a diagonal one). In fact, a test of this line is exactly what was seen, with a breakout suggesting another test of a horizontal level just slightly higher. But the diagonal pivot point--the first line of support vs rising yields--held up to provide a support bounce! Granted, we can't assume yields won't make another run at the line, or even that they won't break through. But as far as this first major retest since economic data is concerned, this is a good "small victory" for the bond market rally. Now we can get back to watching and waiting with a slightly higher amount of hope.

2 Things: Mid-East tensions and short-covering... Let's say you're part of the large percentage of the trading populace that is short the bond market these days. Perhaps you had short positions this week that favored a return to test support at 3.70 or 3.85 before a momentum shift brought yields back down under 3.54. What happens when inflation data prints relatively tame, Mid-East Tensions suggest a flight-to-safety bid (ongoing today), and the bond market begins to rally as a result? Time to cover those shorts! In other words, forced buying. Whether you chalk it up to data that was NOT "unfriendly" enough to bonds or the flight-to-safety bid, you HAVE TO cover your short positions. So we're left with the organic effects of the flight-to-safety bid itself and the short-covering as a result that are both given room to run yields lower today. But one of those things is temporary and the other isn't even bond-bullish at all! It's for these reasons that we are in NO POSITION to confirm a shift in momentum YET. Now granted, just because we're not altogether thrilled with the motivations behind the rally doesn't mean it's not a good first step. If this is what it takes to get things moving in our favor, so be it. But it does mean that NOTHING SHOULD CHANGE about your defensive stance. It's not a time to get complacent and not a time to watch good gains coming in on rate sheets without considering they might not be available for long. Bottom line: it will take MORE than we've seen so far to confirm a true shift in the bond market from bearish to bullish.

It continues to be a good day for the bond market. While 10yr notes are off their best levels of the morning in the 3.55's, they are well under the 3.586 pivot point discussed earlier as the important level to hold, currently at 3.571. FNCL 4.5's remain in great territory at 101-04, still very close to their highs of 101-06.