(Reuters) - A group of bondholders plans to challenge Bank of America Corp's $8.5 billion settlement with holders in soured mortgage-backed securities, saying it may be unfair to other bond investors. In court papers filed on Tuesday in New York State Supreme Court in Manhattan, 11 companies sharing the name Walnut Place said they had "serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms." Bank of America on June 29 announced the settlement with 22 institutional investors including BlackRock Inc, MetLife Inc, Allianz SE's Pacific Investment Management Co and the Federal Reserve Bank of New York. That accord was part of $20 billion of mortgage-related charges that the bank said it would take, hoping to resolve much of the liability from its $2.5 billion purchase in 2008 of mortgage lender Countrywide Financial Corp. But Walnut Place called the settlement "inadequate." It said it plans on July 13 to ask Justice Barbara Kapnick, whose approval is required for the settlement, to excuse it from the accord, or else to compel greater disclosures about the pact.

In case you ever wanted a clear signal that bond markets were "on a fence" and were ready to move in either direction, today is a great example. Both MBS and 10yr Treasuries operated around their 200 day moving averages today, and at the 3pm official close, both were effectively resting on those moving averages. We had the exact mark for 10yr notes' moving average at 3.131, versus an actual 3pm yield of 3.136, and the moving average for 4.0 MBS at 100-02+ versus a 3pm price of 100-03+. Although we're not married to the idea that 200 day moving averages are great forecasting tools, both of these markets tend NOT to cross over their moving averages unless their bags are packed for an extended stay on the other side. A couple caveats here: the phenomenon is more reliably true beginning in 2009, and we couldn't consider "a few 32nds for a few days" to be an actual "crossing" event. So we're not splitting hairs about today's levels, and not at all making a case for bulls or bears. The moral of this story is that we find ourselves--as is so often the case--drifting toward another Employment Situation Report in some sort of "crossroads" territory. That much is to be expected. It's almost always a crossroads heading into NFP. The interesting layer that comes into play tonight is that of the monolithic associations that market-watchers have with the 200-day moving average. It's an almost comical cliche, reminding you what's coming up this Friday. On a serious note though, a big move on Friday could indeed mark a departure from 200-day moving averages for an extended period of time. While we'd hope that departure is in the form of higher prices and lower yields, we certainly wouldn't suggest complacency in accounting for the possibility of a move in the other direction.

Citing growing risks that Portugal will require a second round of official financing before returning to private markets, Moody's downgraded the country's credit rating 4 notches from BAA1 to BA2. The prominent ratings agency also expressed concern that Portugal will not be able to fully achieve deficit reduction and debt stabilization targets, saying that there's an increasing probability that it will be unable to borrow at sustainable rates beginning in the second half of 2013.

The stock lever has disconnected somewhat after earlier pressuring bonds into weaker territory. Both MBS and Treasuries moved to their weakest levels of the day, but never got weaker. For Fannie Mae 4.0 MBS, that was a level of exactly PAR (100-00), and they've been between there and 100-03 ever since. 10yr yields bounced in the mid 3.15's and have been in a narrow range between there and 3.138, currently at 3.143. Volume is palpably lighter--about 2/3rds lighter-- than Friday. The lone economic report and limited excitement from headline news has kept things narrow and uneventful today, but especially uneventful compared to Friday. It's almost like markets have added another day to the long weekend. With MBS up 9 ticks on the day, these are the kinds of boring days that are just fine with us.

Stocks hit their lows of the day shortly after 11am but have since rallied to gain back 3/4ths of their losses since Friday's close. During that same time, 10yr yields have risen from their lowest levels of the day and MBS have fallen a few ticks from their highs. Fannie Mae 4.0's are up 8/32nds on the day now versus 11/32nds earlier. The directionality of recent movements relative to earlier trading is somewhat of a concern, but not unless 10yr yields break above their morning range. Highest yields this morning were just under 3.16 and current yield is 3.153. No cause for concern yet.