With almost three hours of the domestic session traded so far, there's a fairly clear range established in 10yr yields from 1.93 to 1.96. MBS have not been quite as sideways by comparison, instead taking the lower volatility to tighten up ever-so-slightly and create more of a trend of improvement. The longer that benchmarks hold that narrow sideways range, the more microscopic gains might be seen for MBS. This at least gives us something to watch for today. A break above 1.96 in 10's could mean the good times are coming to an end (for today). Otherwise, markets seem to be on some sort of post-holiday-weekend cruise control. So we are too... Watching for opportunities on rate sheets, slightly defensive to pipeline control reprices later in the day, as well as a marked break above 1.96 in 10yr yields.

(Reuters) - The pace of expansion in the U.S. services sector unexpectedly accelerated in August, snapping a three-month streak of slower growth, according to an industry report released on Tuesday. The Institute for Supply Management said its services index rose to 53.3 last month from 52.7 in July. That topped the 51.0 median forecast in a Reuters poll of 71 economists. A reading above 50 indicates expansion in the sector. (Reporting by Steven C. Johnson; Editing by James Dalgleish)

Between a Greek default looking imminent and European data coming in weaker than expected (German Factory Orders down and Eurozone GDP lower than expected), bond markets are in unprecedented territory. After edging just under 2.0% on Friday, 10yr notes are now at 1.936, record lows. MBS can't quite keep pace with this sort of rally as they carry an element of risk as opposed to the generally "risk-free" cachet of Treasuries (in a risk-off trade such as this, the biggest beneficiaries are the those securities on the safest side of the risk spectrum. MBS are seen to be much safer than stocks, but TSYs are a few degrees safer still, thus the outperformance). Fannie 4.0s are up 4 ticks on the day at 104-17 and 3.5's are up 4 at 101-25. The major domestic data this morning comes at 10am with ISM Non-Manufacturing. Given that the current rally is driven by mostly European factors, it will be interesting to see how much ISM moves things, effectively providing hints as to how much US Econ data might matter throughout the week. Some rate sheets might be delayed for that event, but as long as current levels hold rates should be coming out stronger.