Yesterday

- Data wasn't strong enough to dissuade the ongoing, gentle rally

- Fannie 4.0s closed at another new high; highest since before June 19th FOMC

- Fannie 3.5s traded at levels not seen since June 20th; back on the table as current coupon

- Treasuries extended their rally yet another 3-4 bps

- Mortgage rates flat or better for 11 straight days

Today

- Focus is on GDP in the morning, seen coming in at 2.6 (final) vs 2.5 (preliminary)

- Jobless Claims at the same time (830am) and seen rising to 325k from 309k previously

- Stronger-than-expected data stands a good chance to put a crimp in the rally

- Pending Home Sales at 10am is 3rd tier data; not likely to have a major impact

- Auction cycle wraps up at 1pm with 7yr Notes.  We paused heading into y'day's auction and extended rally afterward

Strategy

In a similar vein to yesterday's outlook, we're still on guard against any potential jolts from stronger data.  Anything else, however, is friendly for bond markets, but it seems like next week's NFP will keep any extension of this week's rally from getting too far out of hand.  To be sure, this goes against conventional wisdom of "the trend is your friend," because bond markets are certainly trending positively.  But the other way to view the trend situation is with 10yr yields having just exited a longer term uptrend on Monday and confirming the break yesterday.  In that sense, they'd be more likely to seek out some sideways consolidation, especially with NFP looming.  (see 1st chart below).

Charts

10yr Treasury Yields

Teal line is the recently broken long-term uptrend.  We're currently contending with an important pivot at 2.62.  After that 2.55 would be the next significant pivot with 2.47 either being reserved for a surprisingly strong pre-NFP move or a post-weak-NFP rally.  Note that 2.47-2.70 is where 10's thought they would be before mid-August.

Fannie 3.5 MBS now back to June 20th levels.

Fannie 30yr Fixed MBS - Coupon Swaps (price difference between the listed coupon and the next higher coupon, e.g. Fannie 3.5s are 101-23 and Fannie 4.0s are 104-23, hence the "3" value in orange)

Price gap between 3.5s and 4.0 MBS is now back under 3-06 (right at 3-00 as mentioned above), which is the edge of the "sweet spot" for current coupon liquidity.  4.0s are still very much in the picture, but note that 3.5s reentered the sweet spot right as 4.5s left.