May 3 (Reuters) - For U.S. bond funds, the long and short of it have been the whole story this year. Quite literally, money has flowed into the two extremes -- short duration or long-term bonds -- and steered clear of the middle, the latest data from Thomson Reuters Lipper shows. During the first quarter, investors have pulled funds from bonds with maturities of three-to-ten years. If investors shun the category, the so-called intermediate-range bonds should begin to command higher yields to restore their fan base. But some factors are working against the intermediate-sector that might continue to limit their appeal. Full Story Linked Below:

It's not that we haven't had any data or Fed speakers so far this week, just that the amount of those two things increases greatly tomorrow. First of all, although it's rarely on our radar as a market mover, the 9am announcement of next week's auction supply bears mentioning considering the speculative attention it's garnered today. There are a few stories in the live updates cue if you missed them. Other data includes the standard issue MBA mortgage apps at 7am, ADP's employment numbers at 815am, and ISM Non-manufacturing at 10am. The Fed-Speak schedule thickens as well. First up, Rosengren at 8am, followed by John Williams at 3pm (opened up for Duke last week), and though technically not a market consideration for tomorrow, Lockhart takes the mic at 8pm. No rest for the weary from here on out as tomorrow and Friday simply increase the activity and significance of data and speakers. For a detailed look, see the link below:

NEW YORK, May 3 (Reuters) - The U.S. Treasury, having made space for itself to borrow until August 2, will announce refunding terms on Wednesday that analysts say will likely be the same in size as February and November, with a risk for a smaller three-year auction. Speculation about reduced supply gave Treasuries prices a bit of support on Tuesday after the Treasury Department on Monday trimmed its borrowing estimates for the current quarter by more than half to $142 billion, citing higher tax receipts and lower outlays. But market analysts expect the refunding in May to total $72 billion, as it did in February. "There has been some chatter that Treasury could reduce the size of the refunding following yesterday's announcement that Treasury now estimates its borrowing needs for this quarter to be $142 billion, less than half its preliminary forecast," said Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates in Princeton, New Jersey. But Vanden Houten said she was not changing her estimate. "We expect a set of refunding auctions totaling $72.0 billion consisting of $32.0 billion 3-year notes, $24.0 billion 10-year notes and $16.0 billion in 30-year bonds," she said. A small risk exists that the Treasury could come with a smaller refunding," she added. If that happens, "we think a reduction in the size of the three-year note is most likely." Estimating auction sizes has become "pretty tough at this point," said Thomas Simons, money market economist at Jefferies & Co. "The Treasury's Q2 financing estimates would argue for cuts, but Q3 estimates argue for increases." Still, Simons and other analysts think Treasury plans a $32 billion three-year note auction, a $24 billion 10-year sale, and a $16 billion 30-year auction for May 10, 11, and 12, respectively. [nLDE742019] ( By Ellen Freilich Editing by Diane Craft)

For nearly an hour, stocks fell while bond yields rose. But that disconnection in the stock lever reversed recently and 10yr yields find themselves approaching 3.25 as S&P's hit their lows at 1351.25. MBS are at their best levels of the day with FNCL 4.5's up 3 ticks at 102-31+. It wouldn't be out of the question for a few leading edge lenders to offer a token price improvement if we hold these levels, but we'd need a few more ticks to get more lenders on-board.

WASHINGTON, May 3 (Reuters) - A bill to create a new market for financing mortgages that would help wean the $10.6 trillion U.S. mortgage market off government support advanced in the House of Representatives on Tuesday. The bill aims to establish a market for covered bonds, securities issued by banks and backed by pools of loans. The loans underlying covered bonds remain on the issuer's balance sheet. That is different from the current U.S. mortgage system, where lenders sell many of the loans they make to government-sponsored Fannie Mae and Freddie Mac, which then repackage them as securities for investors. The Obama administration supports the legislation in the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises which is backed by voice vote legislation from Republican Representative Scott Garrett. The bill would have to be approved by the full committee, then the full House and the Senate before being sent to President Barack Obama for his signature into law. Garrett, of New Jersey, thinks a covered bond market could lessen the role of Fannie Mae and Freddie Mac. Senator Charles Schumer, a New York Democrat, said in March he was considering introducing a version of Garrett's bill in the Senate. Representative Carolyn Maloney, a New York Democrat, backed Garrett's bill as one way to help the U.S. mortgage market on the margins, though she cautioned that it is not a panacea. "Why not give it a chance?" Maloney said, adding that she considers covered bonds "a strong tool we could use to help ... our housing market rebound." (Reporting by Corbett B. Daly, Editing by Andrew Hay)

Apparently bond markets are only willing to remain connected to the stock lever if benchmarks maintain a certain high-water-mark. S&P's just put in their lows of the day, but 10yr notes are sideways to slightly higher in yield at 3.268. And while this isn't "weak" per se, it's not a sign of an ongoing rally. Then again, we don't really care about that considering that it would be rather meaningless to extend the rally today in low volume and devoid of meaningful data. FNCL 4.5's are up 2 ticks on the day, in the same 3 tick range that has contained them for the entire session. Pretty boring and uneventful for MBS. At these levels, that's fine with us.

Despite a few harrying moments at 3.282, things have been relatively calm and mostly sideways this morning. 3.282 served as a pivot point throughout yesterday's session and the 5pm mark. That sort of precedent suggests some sort of range-trade is at play, and closer examination proves that to be true. The same trend channel that informed yesterday's highs and lows also capped this morning's gains and losses. Stocks are range-trading a similar trend, lower in price for them versus lower in yield for TSYs. So we have a fairly connected stock lever in addition to the range inside the trend channel to provide guidance. Beyond that, yields have shown a penchant to seek out horizontal intraday pivots that lie somewhere between the extremes of the channel. Tomorrow morning should be telling as it will either host a firm resistance event for yields at the horizontal 3.25 area or hint at an ongoing bullish bias if the trend trumps that resistance. MBS are relieved as benchmark movements begin to make more sense today in an ongoing context and are now 3 ticks up on the day at 102-31 in FNCL 4.5's. The stock lever is currently pulling 10yr yields down to 3.26. 3.25 is resistance from a horizontal standpoint, but 3.24 would be closer to the direction trend-channel resistance. It would take at least that to get MBS into any sort of reprice position given just how "out of room" FNCLs are in terms of further gains.

Based on volume, it's plain to see that it's the Fed's Permanent Open-Market Operation (TSY Buying) driving the market today as opposed to the previous scheduled econ data. Volume ticked up and yields fell to their lowest levels of the day as dealers set their ducks in a row for the Fed's buying consideration. This effectively signaled "this is as low as yields are going, folks! Fed's in. Time to sell." And indeed, selling has been the order of the day since the completion of the 11:00am POMO. Selling volume surged and yields have rapidly ticked up to 3.273, their highest level of the day. Since this is roughly in line with yesterday's LOW yields, it remains to be seen if the rest of the day will host a mere range-trade versus that 2 day pivot point or if the negativity will carry through. That negative carry through would likely be required to weaken MBS enough for a reprice for the worse. Currently the range remains narrow and FNCL 4.5's remain 1 tick up on the day at 102-29. We'd need to be at 102-26 before reprices for the worse became a serious risk. This is entirely possible if TSY yields continue rising as opposed to catching support at current levels.