After a few scattered reprices, MBS and Treasuries are now trying to hold their ground into the 3pm close. Stepping back to a longer-term view and shifting focus from MBS to Treasuries, movement over the past two days looks downright technical and today's auction like more of an incidental boost to yields already on their way to test supportive limits. Whether we're considering the trend channel (red lines) or the pivot point (white line), 10's arguably hit both today. Does that mean they bounce and stay lower now? The official answer might be "who cares," but that remains to be seen. After tomorrow, the year is pretty much over (if it's not over already given current volume tallies) and we wouldn't be drawing any major conclusions about broad sentiment until the new year:

The 7yr Auction came in with much lower than average demand and stopped through at a moderately higher yield than the 1pm when-issued yield. All this after an already weak few days for Treasuries and things are getting ugly in a hurry. 10's are already up to 1.9755 and Fannie 3.5's are down to 102-05.

Things are bad enough and have deteriorated quickly enough that we could see a few reprices for the worse unless this proves to be a knee-jerk of epic proportions that soon shoots Fannie 3.5's back up to 102-10.

Even though stocks and the Euro are trading lower, bond markets have been stubborn this morning in maintaining slightly weaker levels. Given the impending 7yr Auction at 1pm, and observing the disconnection between Stocks/Euro and Treasuries, we'd hope that this extra tinge of bond market weakness is as simple as an auction concession.

7yr Notes have averaged a 2.89 bid-to-cover and saw a historically strong 3.20 in November's auction. Due to timing of auctions and rallies, 7's haven't lined up with some of the super aggressive Treasury rallies over the past few months and thus today's auction will be neck and neck with November's as to the lowest yielding on record. On a 2-week period with 6 note auctions, the motivation to snap up 7's at record low yields could be limited. This is probably what Treasuries have priced-in, so if the auction is decent, we'd expect 1.94 to hold supportively in 10's.