Eurozone contagion made an appearance today in much the same way it did for nearly all of 2010-2012.  This time around, it's Portugal's Banco Espirito Santo causing problems for Portugal's sovereign borrowing costs.  This in turn drove flights-to-safety in more stable EU countries.  The posterchild for such countries is Germany, and as goes Germany's bond market overnight, so goes the US Treasury market, most of the time.

Last night was no exception and as as German Bunds approached their lowest levels--well--ever, Treasuries rallied to their best levels since June 2nd.  When the rally was over in Germany, it was over for Treasuries as well.  No objection from Treasuries there as they were just as well to get ready for the week's last auction in the afternoon. 

Despite the weakening from the morning hours, bond markets were still in stronger shape come time for the 30yr Bond Auction.  The results were slightly weak, but not too bad compared to the typical weak 30yr auction (they can be all over the place in terms of how far the fall from expectations and previous averages).  That kept the selling pressure intact for just a bit longer, but bond markets, including MBS, were able to hold their ground without dipping into negative territory.

Visually, MBS will soon be in negative territory as tonight is "the roll" for Fannie and Freddie 30yr Fixed coupons.  That means that the indicative prices for those MBS will no longer be based on July's coupons and instead be based on August's, which currently trade lower in price.  That switch happens after the close today, making it seem as if prices have fallen by an amount equal to the difference in the two coupons.