Bond markets had already been trending into negative territory leading up to today's 3yr auction, but took a turn for the worse afterwards with some help from a few newswires out of Greece.  All that is detailed in the following alert from MBS Live. 

3 Year Auction Moves The Whole Stack. Greece Piles On. Negative Reprices - 1:34PM

10yr spiked up just after 1pm and MBS prices fell past their 103-19 pivot in Fannie 3.5's. Does that mean that the 3yr note auction is exclusively behind that market movement? Yes and no... 

In and of themselves, 2 and 3yr auctions aren't enough to move the whole pile of Treasuries as they ostensibly have today. But given the current backdrop of bond market weakness following last week's NFP, and the fact that any bounce back versus that weakness was largely due to ongoing uncertainty over the Greek bailout negotiations, there's a fair amount of inherent bearishness seeking to run its course within the range in bond markets. This was actually likely to be the case even BEFORE NFP, and now the higher probability scenario is simply playing out. 

That means that while the 3yr auction wasn't quite weak enough to justify current losses, it was enough to add on to the pre-existing momentum. News out of Greece is now exacerbating the problem. 

At first, it looked like breaking news that today's meeting was postponed until tomorrow would HELP bond markets. Indeed this was the case at first. But then a second wire crossed that clarified the reason for the postponement was that political leaders had yet to get a draft of the bailout agreement. This apparently was less of a concern to the general "risk-on" sentiment compared to other potential reasons for meeting postponement. 

MBS are currently trying to dig their heels in at 103-19 and treat those levels as a floor for the rest of the day, and seem to be capable of such things as long as 10yr yields treat 1.99 as a ceiling, a feat they've been trying to demonstrate for the past 15 minutes or so. 

Even so, the current level of weakness is very likely enough for a few lenders to be considering reprices for the worse, and just as it was earlier in the day, those risks would increase with prices of Fannie 3.5's falling below 103-19.

Since then, bond markets have made some small attempts to bounce back, and we suggested a few price/yield levels to watch that could be useful in assessing that progress (or lack thereof)

Even if there's no sustained bounce back, simply "not losing any more ground" would be nice as we're operating near some longer term technical support levels.  If markets were to casually blow through them, the sudden, excessive weakness would be cause for concern and the volatility would create problems for loan pricing. 

The intermediate support level for MBS (longer term, it's a pivot) is actually right at the 103-19 level from the shorter term chart above.  I included the next major pivot higher and lower for reference.  Incidentally, the lower pivot is right where next month's coupons are currently trading (the roll takes place on Thursday afternoon).

Whether or not MBS are able to hold near or above current levels between now and then may have as much to do with tomorrow's 10yr auction as it does with the potential Greek debt negotiations either being finalized tomorrow (less likely) or instead being extended in some way or at least fraught with caveats (more likely).  10yr yields have their own set of technical considerations at the moment.  Today's moves threaten to break yields out of the trend channel seen within the red lines.  Today would be considered the breakout test with tomorrow acting as potential confirmation or rejection of that breakout.

Whether we want to look at trends as "moving" or "sideways," there are trendlines for each.  In addition to the red trend channel above, the horizontal lines (teal and white) have also been important levels for a longer period of time than the chart shows.  Although yields have fallen just lightly below the upper line between now and the time I snapped this chart, the lower two have acted more as pivot points higher in yield and less as ceilings of support.  That upper line will crumble in short order if tomorrow's auction is rough or if any news out of Greece is well-received.  Beyond that, we'd be looking for pivot points around 2.01 and 2.04, with more grim scenarios closer to 2.09.