Bond markets started the overnight session in better shape, already bouncing back from yesterday's weak closing levels.  Data in China and Japan helped the healing continue for bonds as global equities markets sank.  The Nikkei was particularly hard hit, though S&P futures were considerably lower as well. 

In fact, in light of the weakness in equities markets, the bond gains are not all that impressive.  The combination speaks to an overall marketplace that is doing more to price in a potential Fed rate hike in September (bad for stocks and bonds, but the latter have done more to price it in).

Traders began selling bonds and buying stocks heading into the 930am NYSE open.  After a modest move higher in yield, bonds were still in positive territory when the ISM Manufacturing data arrived.  It wasn't far enough from consensus to move markets significantly, but at 51.1 vs 52.6 forecast, at least it was friendly.

With that, MBS and Treasuries both moved away from what have been their weakest levels of the day.  They certainly haven't done anything impressive in terms of bouncing back though.  In fact, the range has been consolidating ever since, with 10yr yields trading closer and closer to 2.18.  The analogous level for Fannie 3.5 MBS has been 103-24.