Europe moved further into a "risk-on" stance yesterday where a combination of lesser events and pieces of news combined in a unified push to weaker levels for bond markets.  We'd previously noted the symbolic nature of last week's Draghi news and said that if he managed to get anything done in spite of Germany that it would be a significant change in the Euro zone status quo.

We're not sure if THAT'S what's happening, but several news stories out yesterday--not the least of which being "How the ECB Plans To Use Its Bazooka"--certainly seemed to be trying.  As we know, Draghi fired blanks at last week's ECB announcement, but since then, markets somehow have the impression that something has changed with respect to central governance's support for the European periphery. 

Spanish and Italian debt spreads stepped back from the brink, and rather quickly.  German Bunds, the EU 10yr benchmark, rose abruptly into its close at 11am New York time.  Is it a coincidence that this is when domestic 10yr yields essentially topped out after selling off from the wee hours of the morning, and proceeded to go sideways for the remainder of the session? 

No, it's not a coincidence because Europe continues to exert the lion's share of motivation on domestic Treasuries and thus, by default, MBS.  The latter is happy to stay relatively insulated as long as they don't perceive big threats the range.  In other words, on any given day without a panicked sell-off, MBS can generally hold their own vs. Treasuries and usually fare better into sell-offs. 

But when those panicky sell-off's arise, MBS move up-in-coupon.  If that happens in the near future, sure... Fannie 4.0's might do fine vs Treasuries, but production coupons would be just as crushed, if not more.  With 10yr yields around 1.62 so far in the Asian session, yields aren't necessarily on a stampede higher, but if you focus too much on the up-to-the-minute state of markets, it can be too easy to lose sight of the bigger picture.

In that big picture, 1.62 is the highest 10yr yields have been since July 3rd.  Fannie 3.0 MBS are the lowest they've been since July 5th, and right on a 40-day moving average that they've not traded under since April 5th.  Whether it looks like we're bouncing back from these brinks today or falling further, set your own limits and stick to them.  Just because we don't think the Euro zone was magically fixed last week doesn't mean it couldn't prove to be some historical turning point.  That's a long shot (we hope), but don't ignore the risks simply because they've been so absent for so long.

We're interested in today's 10yr Auction as it's one of the only significant items on the agenda.  It could either help bond markets dig their heels in or exacerbate the selling.  Then again, we did just say "it's all about Europe," so we may be very much less interested in the 10yr Auction if nothing is happening in its wake.  Productivity and Costs (an economic report) prints at 8:30am, but is a minor player in this drama.

Charts of some of the longer term technical considerations mentioned above: