Yesterday's busy calendar of economic reports gives way to relative silence.  Existing Home Sales at 10am is the only scheduled release.  But as we've been keen to note, although domestic economic data has not been irrelevant, the market's focus remains on Europe.  On that front, things have sort of degenerated into complacency.  At mostly 1.87 to 2.10, 10yr yields have been in an excruciatingly narrow range of yields considering all that seems to be at stake.  If we thought we were experiencing "European News/Data Exhaustion" before, there's no question we're experiencing it now.

And so the market is left to trade a range for now.  Short term, if 10yr yields cross over 2% today, that will do some damage to MBS, but not nearly as much as a break of 2.10.  Such yields in 10yr notes seem to have coincided with Fannie 3.5's languishing between par and 102 while the sub 2.10 levels have seen 102-00 and above.  Yes, Fannie 3.5's are at 102-23 this morning (2 ticks down on the day) and we're talking about 102-00.  Those 23 ticks could be shed in the blink of an eye if 10's break support, which is slightly different depending whom you ask, but everyone can agree that the general area around 2% stands as at least some sort of pivot.

Are we destined to experience those losses today?  Probably not, but it is possible.  More likely, the bigger movements will be reserved for next week's FOMC announcement, but it's not uncommon for the volatility surrounding that event to rear its head well in advance.  To that end, WSJ's Hilsenrath, widely regarded as the unofficial press-release department for the FOMC, was out yesterday evening saying that QE3 is unlikely to be announced at next week's meeting and that the case for bond-buying will be harder to make if inflation stays over 2% and labor markets continue to ease.  Without being too much of a conspiracy theorist, it borders on safe to assume that these thoughts--even if not explicitly shared in Wednesday's announcement--come straight from the horses' mouths.

More timely and more European is the Greek bond swap situation.  Negotiations are ongoing and have moved the needle a few times this morning in addition to GE earnings.  Bottom line here is that we remain at risk of European headlines exerting significant influence on bond markets, irrespective of next week's FOMC.