"Very narrow on what feels like a super volatile day. Italy imploding, Greek PM issues, Dow loses 400pts, crappy auction, big swing in the 10 year. .....and a 4 tick range in MBS'. Weird day."  This comment from Jeff Anderson just came across in the Live Chat window on MBS Live, and I think it captures the essence of today's MBS trading.  We've been volatile within a range--started strong, weakened mid-day, especially after the auction, and eventually battled back to form the trend channel seen in the chart below:

You'll notice the note on the chart mentions "stock/euro" weakness.  To wit, the S&P moved from the very highest to the very lowest limits of it's recent trend channel today:

Here's the alert we posted as the afternoon sell-off intensified in stocks:

Potential Reprices For The Better as MBS Approach Highs 2:35 PM

This alert isn't so much about proclaiming the likelihood of reprices for the better as it is about shifting the stance of the previous, more bearish alert at :14. Things have certainly changed since then. We weathered the storm of a lackluster auction fairly well, and now, with the help of a stock market and Euro/Dollar in full-sell-off mode, MBS have actually been trading in a positive trend channel in the PM hours. 

That said, we still wouldn't get hopes up for positive reprices too much. 10yr yields are just now back to pre-auction levels and MBS are only barely inside the lower end of their positive afternoon trend. 

Stocks seem to be showing some resolve against a sell-off that kicked into high gear after the Eurogroup's Jean-Claude Juncker characterized the Euro Zone's public debt issues as "a crisis" (ironically, in an attempt to refute the notion that the Euro itself was in a crisis). Certainly, the Euro is not in a crisis in the big picture, but certainly it's not looking so hot in the intermediate term. In trying to defend the Euro, Juncker unwittingly added to the bonfire of uncertainty that is the entire sovereign debt mess in the EU. And for that, Jean-Claude, bond markets thank you (and MBS watchers MIGHT even see a reprice or two in the process! look for a 10yr benchmark around 1.95 and MBS at or above 102-06 in Fannie 3.5's to make that more likely).

If that makes it seem like it's all about Europe, it's for good reason.  Take a look at the level of connection between the Euro and stocks today (stocks in blue, euro in green, 10yr yields in yellow included to show Treasuries' specific concerns with today's rather weak auction)

But in the big picture, the auction response was muted by the ongoing focus on the EU.  Ultimately, 10's were able to pivot off the 2.0% level as support and retest the 1.95% mark, although they seem to be remaining contained there for now:

All of the above leaves MBS in position to endure the 8/32nds price change from tonight's roll and remain over the 101-26 level in 3.5s (currently December 3.5's are right about there, which is what we were hoping to see by the end of trading today in order to maintain some continuity in the technical picture).  See the horizontal support at 101-26 below as well as the upwardly sloped line which constitutes a trend of improvement that MBS can try to hold if tomorrow proves to be another green day. 

Bottom line though, we'd be more convinced about further bullish momentum in bonds if 10yr notes broke 1.95.  Even then, recent history has shown that they only really care to do so when "panic" and "Flight-to-Safety buying" are the prime directives....  Not exactly a stable foundation for MBS rallies.