Both MBS and TSYs have extended gains and keep pressing into the best territory of the year, despite a rallying stock market, despite universal recent cries of "overbought," and despite what many considered an appropriate time for bonds to give back a bit of recent gains, things just keep improving. Traders call this betting against the consensus a "fade," and the current rally past 3.14 in 10yr TSYs has been an epic example. 10yr yields are currently at 3.064 after breaking 3.09+ resistance today and even bouncing off it as a supportive pivot. FNCL 4.5's are 11 ticks up on the day at 103-27 after recently having broken 103-24 resistance that contained them since 11am. Reprices for the better have already been seen in fairly high quantities and not only may more follow, but some lenders may come back for a 2nd helping depending on initial release time and 1st reprice time/aggressiveness.

To call today's 7yr note auction "strong" is putting it mildly. But even so, the reaction seen in bond markets is merely one of confirmation. Drawing on the ongoing Greek debt drama as well as weaker than expected economic data, this morning saw heavy volume and good gains. Normally, we'd expect a bit of a bearish concession heading into a TSY auction, or expect the auction to be a bit on the weak side if it had been preceded by such a rally. So the strength of the auction is confirming yields that might otherwise be too aggressive all things being equal. In other words, a lot of the "post-auction rally" actually occurred before the auction with the results merely confirming it. If that sounds like a bad thing, it's not. It's a big deal for 10yr notes to have broken out of the 3.095 range that had contained them, and to have done so in insanely high volume (on pace for the highest day of the year). FNCL 4.5 MBS have been holding rock-steady near their highs, deviating less than a tick from 103-24 since the auction. That's 8 ticks up on the day and enough for reprices for the better. Some have already been seen, and others should follow if current levels are maintained.

Treasury just finished its final auction of the week with a $29 billion 7-year note offering. The fundraising process went smoothly, completing the 2s/5s/7s trifecta with ease even though the curve continues to trade at extremely overbought levels. Demand as measured by the bid to cover ratio was 3.24 bids submitted for every one accepted by Treasury. That is the highest BTC ratio we have on record for 7s. Bidders were willing to pay up for this issue as demonstrated by the 2.429% auction high-yield vs. the 1pm "When Issued" yield of 2.438%. Direct buyers were the top star, taking down a well above average 13% of the issue and 30.5% of what they bid on. Directs tendered about $4bn more than usual here which indicates a burning desire to add inventory (short covering!). Indirects were average participants but like directs they tendered about $4bn more than normal. The Dealer award was slightly below average even though they tendered almost $6bn more than usual. The larger than normal size of tenders from dealers, directs and indirects is the headline, it means there were many willing buyers, they just wanted cheaper prices/higher yields. There is clearly no shortage of demand for our debt! The bond market hasn't rallied on in the aftermath but that's OK because we're holding near session bests regardless of stocks, which just printed new intraday highs themselves.

LUXEMBOURG/ATHENS, May 26 (Reuters) - The International Monetary Fund may withhold the next slice of aid to Greece due next month, the head of euro zone finance ministers said on Thursday, spooking markets with the prospect of default. European stocks extended losses and safe haven bond futures gained after Jean-Claude Juncker said the IMF expected the European Union to step in if it were unable to release the June aid tranche, but that would be impossible. Greece's finance minister said this week that if the next 12 billion euro payment was not forthcoming, the country would be unable to meet its obligations and would default. "If the Europeans have to acknowledge that the disbursement from the IMF on June 29 cannot be operationally implemented, then the expectation of the IMF is that the Europeans would step in for the IMF and take upon themselves the IMF's portion of the financing," Juncker told a conference in Luxembourg. "That won't work because in certain parliaments -- Germany, Finland and the Netherlands and others too -- there is no preparedness to do so," he said. (By Axel Threlfall and Renee Maltezou)

In flat-out defiance of the stock lever, TSYs and MBS are holding onto their heady new levels today despite S&P's return to breakeven levels. 10yr notes made it well into the 3.07's but have since moved slightly higher to 3.085. The technical inflection point is in the mid 3.09's. FNCL 4.5's are up 8 ticks on the day at 103-24, their best levels of the year. Reprices for the better have been reported and more may follow if current levels hold. The 7yr TSY Auction happens in about 45 minutes and could be a market mover. The default assumption is a challenging auction due to this morning's rally making yields ostensibly less and less enticing. Then again, we'd mostly rallied into yesterday's 5yr auction, which saw the lowest yields of the year met with the best demand in nearly 2 decades, so we'll wait to count hatched chickens at 1pm.