The week gets off to a slow start today with essentially nothing on tap for the domestic or European calendars save for a relatively inconsequential report on wholesale prices out of Germany.  The highlight of the domestic session will be regularly scheduled Fed "Twist" buying between 10:15 and 11:00am, this time in the 24-30yr maturity range.  With the current week being yet another prime opportunity for summer vacationing, we're expecting volume to continue to be light, potentially leading to above-average volatility given the below-average data.

At least that's true for Monday, but the importance of data picks up on Tuesday.  In fact, the week's most important European data will arrive in the overnight session with what is  probably the week's most significant domestic data out at 8:30am New York time with July Retail Sales, expected to have risen 3/10ths of a percent after falling 1/2th percent last month.  Producer Prices prints at the same time, but without going overboard, we'd venture to say that the markets' focus on US inflation data couldn't be any lower.  Business Inventories for June follows at 10am.

Thus begins the real battle of the week: to determine whether or not the previous 2+ weeks of selling-off for bond markets was simply an ideal tactical opportunity for a course correction within a broader "low and sideways" theme.  With 10yr yields getting as high as 1.73 last week, we came very close to our 1.75 line-in-the sand, the breaking of which would have confirmed that we were experiencing something more profound than a low volume summertime correction and auction concession. 

The farther away we get from last week with bond markets relatively stable, the more we will view it as that ideal tactical opportunity (that is to say, it was a "vacation" week with relatively absent European markets, Treasury auction supply to help psychologically prime markets for some moderately paced selling, not to mention the aggressive move to all-time lows in late July.  Indeed many previous dips to periodic lows have been followed by trading that's decidedly more volatile than what we've just witnessed.

Even though it might behoove us to wait for the dog days to pass, we'll take what we can get in terms of feeling out bond markets for their preferred ranges and trends heading into the traditionally busier month of September.  The tamest eventuality would be for bond markets to settle into a sort of sideways, repressed holding pattern with 10yr yields between 1.55+ and 1.70, which is where they spent most of June.  In terms of MBS, there's a major pivot point at the 103-00 level in Fannie 3.0s.  This did a fantastic job of holding its ground last week, but admittedly, MBS and Treasuries alike both still look susceptible to further trends of weakness unless the first few days of this week confirm the inception of a bounce back seen late last week.