Using 10's as a benchmark, we came into the week around 3.18 and have spent about equal amounts of time on either side of that in roughly equal proportions. Perhaps the tacit implication is similar to what we said the explicit implication would be at the end of last week: that the current week could take as long as Friday to allow the full picture of economic data and the auction cycle to cast it's vote on impending bond market directionality. With today's crappy 30yr auction in the rearview and with 10's only having moved up to the high end of the recent range at 3.24, it's still a bit undecided even if slightly on the bearish side. So perhaps tomorrow's data will help the decision making process after all... (it sure didn't look like it after the killer 10yr auction yesterday). What's the data? There are only two reports on the agenda, The Consumer Price Index at 830am and Consumer Sentiment at 955am, two of the most important inflation metrics each month, and arriving on a week with plenty of Fed-Speak about inflation. Market moving potential for sure. For more details on their significance and the outlook, see the link below.

As far as sell-off's go, this one was fairly tame. 10yr notes had already reached 3.21+ before the auction, so jumping up for a support bounce on the 3.24 target seemed reasonable (especially if you read yesterday's commentary). Tamer still, has been the MBS version of the sell-off, from 103-06 to 103-01, just barely enough for a reprice. FNCL 4.5's are already back up to 103-04, decreasing the severity of any remaining reprices for the worse and in some cases, perhaps obviating them. 10yr notes are currently at 3.223 which is just exactly in line with the modal (most frequently recurring) support yesterday. Very technical.... which suggests that today's auction doesn't grant markets an overwhelming enough sense of direction to break any higher in 10yr yields. It could be that tomorrow's data does the trick, but for now, all we know is that today didn't.

With benchmark TSYs under sever pressure following the 30yr auction and with 10yr TSYs having just broken overhead support, the relative strength in MBS can only hold out against that sell-off for so long. FNCL 4.5's are finally losing ground. down 6 ticks on the day now to 103-01. Reprices for the worse are possible and increasingly so if prices break into the 102's or remain close by for an extended period of time.

The 30yr bond auction met with much weaker demand than previous recent auctions, garnering only 2.43 dollars in bids for every one of the $16 billion dollars offered. At 1pm the when-issued yield stood at 4.355 so the 4.380 High Yield awarded at the auction constituted a "tail" of 2.5 bps. Taking a mere 33% of the auction, Indirect Bidders were a fairly light sponsor whereas dealers were forced to shoulder more of the borrowing burden than normal, 58% vs 48% (average of last 5 auctions). Overall, it's a weak auction which we may well have expected given yesterday's rally, but the hope was that this morning's weakness would have baked-in a sufficient concession so as to minimize post-auction selling. The initial movements in TSYs have naturally been weaker, but 10yr yields are holding on to their 3.24 support level so far. MBS are much better by comparison. Although at their lows of the day, 4.5's are down only 2 ticks at 103-05.

10yr notes are up to their highest levels of the day at 3.20. The assumption is that this weakness has at least something to do with discounting the 30yr bond auction which arrives in about an hour. Stocks are also moving higher off their morning lows but seem stuck near unchanged levels for now. One problem with default reliance on the 10yr note on days like to day is that it's experiencing a bit of a snap back in terms of yield movements relative to the rest of the curve. It's up 4.5bps in yield whereas the next worst performer, 5 yr notes are up only 1.5bps. That makes it seem less farfetched for FNCL 4.5 MBS to be down only 2/32nds in price on the day at 103-05, otherwise it would be tough to explain such a wide gap out between 10's and MBS. Still... we'd expect TSYs to feel the pain of a pre-auction concession as opposed to MBS, which are normally much less affected. The nice thing about the concession is that it sets up 30yr yields (up 1.36 bps at the moment) in slightly more attractive position than yesterday, hopefully serving to bolster demand at 1pm.