The New York Fed's Empire State Manufacturing Index is by no means an inconsequential report, but even the big miss it experienced yesterday isn't sufficient to counteract the much-stronger-than-expected Retail Sales numbers.  In other words, if bond markets were solely trading the data, we would have seen weakness yesterday morning as opposed to a rally to the best levels in over a month.

As we, and most of the rest of the world discussed yesterday, Spanish debt drama was a big enough concern for the Euro-zone that it helped fuel a flight to safety in German Bunds as well as US Treasuries.  The "drama" in this case, wasn't especially dramatic compared to the more harrowing moments of Greece's recent bailout saga, but Spanish 10yr yields over 6% conjure up fears that Spain is heading down a similar path to Greece.

So bond markets were better bid (more buyers than sellers = higher prices, lower yields) on Monday than they otherwise might have been but ultimately gave back a decent amount of the gains by the end of the day.  This leaves us to wonder whether we're more keen to trade data, Europe, or the range.  

Given that European benchmark yields were already rising by the time Treasuries began rising makes it hard to tell if the motivation lay there or simply with a technical rejection of a break below 1.95% in 10yr Treasuries.  But the morning movement tells us enough.  It suggests that, while markets remain cognizant of domestic economic data, Europe is officially in play, for better or worse.

That means that any "risk positive" tones coming out of Europe during the overnight session will set up tests of higher yields in Treasuries.  Despite the probable losses for MBS in this case, this would actually be the less interesting eventuality as Treasuries have more room to run higher in yield than lower with respect to their recent range.  

Further "risk negative" tones would be more interesting, as they could prompt a test of lower recent yields, helping us assign clearer weight to Europe vs. The Range vs. Data.  As is usually the case, we'd expect that any of those three players could offer up a surprise of sufficient magnitude to win the race, but it's clear after this morning that "data" is the least likely to do so.  

When it comes to The Range vs. Europe, that's a much closer race.  Rather than there simply being a winner and a loser, we'd say they'd perform differently depending on the conditions, much like a change in weather conditions can favor one team over another in football.  If things are stormy and the Euro-Drama is intense enough, it will show little regard for the range, easily breaking lower past 1.95.  Absent sufficient Euro-Drama, the range is a more stalwart opponent, especially if assisted by economically bullish data.

Bottom line: tough road ahead if bond markets want further gains unless there's a sufficient flight-to-safety bid out of Europe and no objection from domestic data.