Today's market activity is a tale of two events: the morning's Durable Goods data and the afternoon's 5yr Treasury auction. 

Heading into the 8:30am Durable Goods release, bond markets were slightly weaker.  This is a report that doesn't always result in a market reaction, but certainly reserves that right in the case of bigger deviations from forecasts.  In this case, the +2.2 headline seemed like a big enough 'beat' versus the +1.0 forecast  to justify some concern on the part of bond markets.

Yet MBS and Treasuries both moved quickly into positive territory.  What's up with that?

In short, the internals.  Here's how we described it in the update issued to MBS Live subscribers this morning:

As with so many economic data releases, today's Durable Goods report has a "headline" and "internal components."  The headline is simple enough; just "durable goods orders."  The components are essentially the building blocks for the headline, or some combination of those building blocks meant to filter out some level of volatility in the data. 

For instance, if we know that a large portion of the headline is accounted for by aircraft manufacturing, and defense spending, and if we know that these two components can vary greatly from month to month, we may well be interested to know how Durable Orders fared without contributions from those two components.

Indeed this is one of the most closely watched internal readings in the report--the "Nondefense Ex-Air."  Simply put, it's Durable Goods minus aircraft manufacturing and defense spending.  It's interesting today because it fell by 1.3 percent compared to a forecast gain of 0.7 percent.  It was also revised down to +0.8 in January from +1.5 previously.

For the most even-keeled component of the report to miss by that much AND to be revised so much lower is a more meaningful consideration for markets than the headline Durable Goods reading of +2.2.  As such, markets are able to overlook the stronger-than-expected headline and Treasuries/MBS are permitted a moderately-sized morning rally.

The good times kept rolling with little volatility right up to the 1pm 5yr Note auction.  It ended up being stellar, with much higher demand and lower yield than expected.  Bond markets improved further after that, taking production MBS coupons (the stuff that matters to rate sheets) into +.25-.375 territory day-over-day. 

Even now as we head into the last hour of the day, Treasuries and MBS got another boost and stocks another hit from news that the Fed rejected 5 banks' capital plans after the latest round of stress tests.  The rally hasn't resulted in any new highs for MBS, but it's helping to maintain what we've already seen.