Bond markets had already been trending into negative territory leading up to today's 3yr auction, but took a turn for the worse afterwards with some help from a few newswires out of Greece.  All that is detailed in the following alert from MBS Live. 

3 Year Auction Moves The Whole Stack. Greece Piles On. Negative Reprices - 1:34PM

10yr spiked up just after 1pm and MBS prices fell past their 103-19 pivot in Fannie 3.5's. Does that mean that the 3yr note auction is exclusively behind that market movement? Yes and no... 

In and of themselves, 2 and 3yr auctions aren't enough to move the whole pile of Treasuries as they ostensibly have today. But given the current backdrop of bond market weakness following last week's NFP, and the fact that any bounce back versus that weakness was largely due to ongoing uncertainty over the Greek bailout negotiations, there's a fair amount of inherent bearishness seeking to run its course within the range in bond markets. This was actually likely to be the case even BEFORE NFP, and now the higher probability scenario is simply playing out. 

That means that while the 3yr auction wasn't quite weak enough to justify current losses, it was enough to add on to the pre-existing momentum. News out of Greece is now exacerbating the problem. 

At first, it looked like breaking news that today's meeting was postponed until tomorrow would HELP bond markets. Indeed this was the case at first. But then a second wire crossed that clarified the reason for the postponement was that political leaders had yet to get a draft of the bailout agreement. This apparently was less of a concern to the general "risk-on" sentiment compared to other potential reasons for meeting postponement. 

MBS are currently trying to dig their heels in at 103-19 and treat those levels as a floor for the rest of the day, and seem to be capable of such things as long as 10yr yields treat 1.99 as a ceiling, a feat they've been trying to demonstrate for the past 15 minutes or so. 

Even so, the current level of weakness is very likely enough for a few lenders to be considering reprices for the worse, and just as it was earlier in the day, those risks would increase with prices of Fannie 3.5's falling below 103-19.

Since then, bond markets have made some small attempts to bounce back, and we suggested a few price/yield levels to watch that could be useful in assessing that progress (or lack thereof)

Even if there's no sustained bounce back, simply "not losing any more ground" would be nice as we're operating near some longer term technical support levels.  If markets were to casually blow through them, the sudden, excessive weakness would be cause for concern and the volatility would create problems for loan pricing. 

The intermediate support level for MBS (longer term, it's a pivot) is actually right at the 103-19 level from the shorter term chart above.  I included the next major pivot higher and lower for reference.  Incidentally, the lower pivot is right where next month's coupons are currently trading (the roll takes place on Thursday afternoon).

Whether or not MBS are able to hold near or above current levels between now and then may have as much to do with tomorrow's 10yr auction as it does with the potential Greek debt negotiations either being finalized tomorrow (less likely) or instead being extended in some way or at least fraught with caveats (more likely).  10yr yields have their own set of technical considerations at the moment.  Today's moves threaten to break yields out of the trend channel seen within the red lines.  Today would be considered the breakout test with tomorrow acting as potential confirmation or rejection of that breakout.

Whether we want to look at trends as "moving" or "sideways," there are trendlines for each.  In addition to the red trend channel above, the horizontal lines (teal and white) have also been important levels for a longer period of time than the chart shows.  Although yields have fallen just lightly below the upper line between now and the time I snapped this chart, the lower two have acted more as pivot points higher in yield and less as ceilings of support.  That upper line will crumble in short order if tomorrow's auction is rough or if any news out of Greece is well-received.  Beyond that, we'd be looking for pivot points around 2.01 and 2.04, with more grim scenarios closer to 2.09.

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Gain access to the most accurate real-time back month TBA indications from Thomson Reuters and Tradeweb. LEARN MORE MBS MID-DAY: Mostly Sideways After NFP-Inspired LossesA recap of MBS Market Updates provided by MND Analysts and streamed live to the MBS Live Dashboard.10:20AM  :  ALERT: MBS Struggle to Hold Lows Following 2nd Round of Econ Data Admittedly, ISM Non-Manufacturing and Factory Orders are not the most critical market-moving economic reports. Case in point, see the 58k 10yr contracts traded in the 10 minutes following these two, versus the 268k contracts in the 10 minutes following NFP earlier this morning.

That said, they're enough to give already teetering bond markets a slight nudge, resulting in MBS revisiting their lows of the day at 103-18+ and 10yr yields pushing higher past support. The breakout in 10yr yields is only slight at this point, but if it goes any further, MBS could soon be looking at their own break of support.

10:10AM  :  ECON: Service Sector Growing Faster Than Expected - ISM The NMI registered 56.8 percent in January, 3.8 percentage points higher than the seasonally adjusted 53 percent registered in December, and indicating continued growth at a faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 59.5 percent, which is 3.6 percentage points higher than the seasonally adjusted 55.9 percent reported in December, reflecting growth for the 30th consecutive month.

The New Orders Index increased by 4.8 percentage points to 59.4 percent, and the Employment Index increased by 7.6 percentage points to 57.4 percent, indicating substantial growth in employment after one month of contraction. The Prices Index increased 1.5 percentage points to 63.5 percent, indicating prices increased at a slightly faster rate in January when compared to December. According to the NMI, 12 non-manufacturing industries reported growth in January. Respondents' comments are mostly positive about business conditions. There is concern about cost pressures and the sustainability of the recent spike in activity.

RTRS - ISM NON-MANUFACTURING PMI INDEX AND BUSINESS ACTICITY INDEX AT HIGHEST SINCE FEBRUARY 2011

RTRS- ISM NON-MANUFACTURING EMPLOYMENT INDEX AT HIGHEST SINCE FEB 2006

RTRS - ISM NON-MANUFACTURING NEW ORDERS INDEX AT HIGHEST SINCE MARCH 2011

10:06AM  :  ECON: Factory Orders Rise, but Pace Slower Than Expected New orders for manufactured goods in December, up two consecutive months, increased $5.3 billion or 1.1 percent to $466.2 billion, the U.S. Census Bureau reported today. This followed a 2.2 percent November increase. Excluding transportation, new orders increased 0.6 percent.

Shipments, up seven consecutive months, increased $3.4 billion or 0.7 percent to $459.4 billion. This followed a 0.2 percent November increase.

Unfilled orders, up twenty of the last twenty one months, increased $12.7 billion or 1.4 percent to $911.5 billion. This followed a 1.3 percent November increase. The unfilled orders-to-shipments ratio was 6.00, down from 6.13 in November.

Inventories, up twenty six of the last twenty seven months, increased $0.4 billion or 0.1 percent to $610.1 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.4 percent November increase. The inventories-to- shipments ratio was 1.33, down from 1.34 in November.

RTRS- U.S. DEC FACTORY ORDERS +1.1 PCT (CONSENSUS +1.5) VS NOV +2.2 PCT (PREV +1.8 PCT)

RTRS - "Orders for non-defense capital goods excluding aircraft - a closely watched category because it is taken as a sign of businesses' future spending plans - climbed a solid 3.1 percent in December. That followed declines of 1.5 percent in November and 0.9 percent in October. "

8:54AM  :  ALERT: First Signs That Bond Markets Have Stopped the Bleeding So far, it looks like we've witnessed a support event around 1.925 in 10yrs and 103-22 in Fannie 3.5 MBS. The latter has been ticking sideways at 103-26 for nearly 10 minutes now, and 10yrs are testing to break their lowest yields since NFP, around 1.896. 8:33AM  :  ECON: Non-Farm Payrolls Crush Expectations. Positive Revisions RTRS - U.S. JAN NONFARM PAYROLLS +243,000 (CONSENSUS +150,000) VS DEC +203,000 (PREV +200,000), NOV +157,000 (PREV +100,000) RTRS - US JAN PRIVATE SECTOR JOBS +257,000 (CONS +170,000), DEC +220,000 (PREV +212,000) RTRS - U.S. JAN GOVERNMENT JOBS -14,000 VS DEC -17,000 (PREV -12,000) RTRS - U.S. JAN JOBLESS RATE 8.3 PCT, LOWEST SINCE FEB 2009, (CONSENSUS 8.5 PCT) VS DEC 8.5 PCT (PREV 8.5 PCT) RTRS - U.S. LABOR FORCE PARTICIPATION RATE 63.7 PCT IN JAN VS 64.0 PCT IN DEC RTRS - U.S. JAN AVERAGE HOURLY EARNINGS ALL PRIVATE WORKERS +0.2 PCT (CONS +0.2 PCT) VS DEC +0.1 PCT (PREV +0.2 PCT), TO $23.29 VS DEC $23.25; JAN YEAR-ON-YEAR EARNINGS +1.9 PCT RTRS - U.S. JAN AVERAGE WORKWK ALL PRIVATE WORKERS 34.5 HRS (CONS 34.4 PCT) VS DEC 34.5 HRS (PREV 34.4), FACTORY 40.9 VS 40.6, OVERTIME 3.4 VS 3.3 RTRS - U.S. JAN FACTORY JOBS +50,000, BIGGEST INCREASE IN ONE YEAR, (CONS. +15,000) VS DEC +32,000 (PREV +23,000) RTRS - ANNUAL REVISION ADDS 162,000 JOBS FROM MARCH 2011 NON-SEASONALLY ADJUSTED LEVEL VS. EARLY OCT ESTIMATE OF +192,000 RTRS - ANNUAL REVISION ADDS 165,000 JOBS FROM MARCH 2011 LEVEL ON A SEASONALLY ADJUSTED BASIS RTRS - U.S. JAN GOODS-PRODUCING JOBS +81,000, CONSTRUCTION +21,000, PRIVATE SERVICE-PROVIDING JOBS +176,000, RETAIL +10,500 RTRS - U.S. JAN AGGREGATE WEEKLY HOURS INDEX FOR ALL PRIVATE WORKERS +0.2 PCT VS DEC +0.5 PCT RTRS - U.S. JAN NONFARM PAYROLLS INCREASE LARGEST SINCE APRIL 2011, GOODS-PRODUCING JOBS INCREASE LARGEST SINCE JAN 2006 8:30AM  :  ALERT: Major Upside Surprise for NFP. Bonds On The Retreat more to follow. pretty ugly so far. 10's up almost 10bps, MBS down 24 ticks to 103-10. Could be that we're seeing the ugliest part of the whipsaw reaction, but we'll update you either way. 8:21AM  :  ALERT: Overnight Trading Suggests Markets Waiting on NFP On Monday, 10yr yields began the week at just over 1.84, and they've traded about a 6bp range ever since. From lunch-time on Wednesday through right now, there are no hour-over-hour moves greater than 2bps. This is a very calm market that has arguably been waiting for SOMETHING, perhaps resolution to Greek bond-swap/PIL, perhaps NFP, or perhaps a combination of the two.

Overnight trading seems to give the nod to NFP as Reuters reported EU governments might have to give Greece another 145 bln Euros in a 2nd assistance package. If we stretch our imaginations, we can maybe see some volume come in around that news, bringing yields down slightly, but a) it wasn't much and b) we're smack dab in the middle of the week's range.

MBS opened 1 tick up and Treasuries just under 1bp lower than yesterday. The whole of the overnight session took place in a 2 bp range in 10yrs and in moderately light volume. Stock futures are dead even with yesterday's 4pm levels. So we'll say that which the market seems to have already said: bring on NFP!

Matthew Graham  :  "http://screencast.com/t/dcWqwxIqP" Matthew Graham  :  "hard to see on the 2 day chart, but several ceiling bounces at 103-23 just now, which had earlier seen the majority of support bouncesbefore about 9:18" Matthew Graham  :  "103-23 Jude. 4 days ago, all time higher were 103-29" Michael Stark  :  "we - WF retail start harp 2.0 Monday : )" Jude Bridwell  :  "GM all. Double digit red = not cool" Adam Quinones  :  "lots of red on the board....yet FNCL 3.5s still near 104 handle. HAHAHA...wow." Aaron Buyside Meyer  :  "I heard Wells retail is starting HARP 2.0 on Monday" Andy Pada  :  "Update: on the cash window, I can buy a 10 day commitment and extend for 20 days at 20bps or I can buy a 30 day commitment pricing is still worse by 30 bps than 10 day with 20 day extension...ridiculous" Matthew Graham  :  "Ralph (with respect to "30yr taking a header"), for what it's worth, note the yield changes in TSYs as opposed to the price changes (which tell you much less b/c the coupons change periodically). With that in mind, the yield curve looks to be steepening in a fairly linear fashion, i.e. 2's through 30's all with 2-3 bps higher yields from one maturity to the next" Adam Quinones  :  "drop in participation rate does some "cooking"" Adam Quinones  :  "warm weather certainly helps construction" Ralph Migliozzi  :  "Wait you think they are cooking the numbers? No....shocking" Justin Bayle  :  "What are the chances the labor market is improving more and more in an election year!!" Andy Pada  :  "Cash window just implemented at least a 50 bps difference between 10 day and 30 day locks" Andy Pada  :  "Relatively speaking, aren't we at last Friday's levels?" Matthew Graham  :  "I tried to push fence-sitters last night. " without any bias toward what might happen tomorrow, few if any savvy market watchers would find fault in locking an interest rate the day before an influential piece of economic data, when MBS have just traded to their all-time highs. Some folks might prefer a riskier stance in the hopes of a rate-friendly jobs report tomorrow or some other future chance at a lower rate, but if you're inclined to lock and/or have been on a fence, it's about as good a" Jeff Anderson  :  "Was just thinking the same thing, Jason." jason lewis  :  "maybe we can push some people of the fence now" Matthew Graham  :  "There's "a" bounce Oliver. I'd be shocked if it held" Oliver S. Orlicki  :  "theres our bounce:)" Ira Selwin  :  "did someone say reward/risk instead of risk/reward? Need to wait until initial reaction calsm, but is a good example of how quick things can move." John M Roberts - TN Consumer  :  "That's gonna leave a mark. " Victor Burek  :  "plus revisions higher" Jeff Anderson  :  "Holy smokes." Victor Burek  :  "135k to 150k..depending on who you ask" Tony Cardinal  :  "Anticipated nfp is what today?" Discuss the MBS and Mortgage Markets on Our Streaming Dashboard

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MBS Improve After Morning Data, But Underperforming Vs. Treasuries

With the 10:00 AM print of this month's Consumer Confidence report, the morning's economic data is done. Stocks and bonds hadn't been too well connected until then, but the general movement since then has been in favor of lower yields and lower stock prices.  This hasn't been entirely a factor of data, as the recently completed scheduled Fed Treasury buying contributed to the rally.  S&P futures are down to 1305 at the moment after being as high as 1317 earlier this morning.  10yr yields are trading just below 1.83, and thus have recaptured most of yesterday's gains.

 MBS are a different story.  Whereas 10yr TSYs have merely experienced a measured little move beyond yesterday afternoon's weakest levels, MBS fell all the way to Friday afternoon's prices.  Although MBS prices are certainly making gains with the rest of the bond market, prices are not yet back into yesterday morning's very tight range whereas Treasury yields are.  This can be seen in the following chart.  We've inverted 10yr yields and overlaid them with MBS prices (inverting 10yr y-axis means that the line will generally move in the same direction as MBS since MBS are displayed in Price and TSYs in Yield):

There are all sorts of explanations for the differences in performance between MBS and Treasuries, not to mention the most popular and always the most likely candidate when bond markets are rallying: Treasuries simply tend to outperform into rallies and underperform into sell-offs.  There are other factors at play in the current scenario and all deserve a look.  

From a simple price perspective, MBS hit their all time highs yesterday and have been nudging the upper limits of a trend channel.  Both of these technical factors could add to the sense of resistance at current levels.  It's interesting to note that MBS prices fell far enough yesterday afternoon to get back inside the ongoing trend channel, thus getting daily resistance there while using the horizontal line at all-time highs as intraday resistance.  Both lines are included in the chart below:

Then there's the matter of recent MBS performance vs Treasuries.  Beginning with the inclusion of MBS in the September 21st FOMC Announcement (first mention of "twist"), spreads between MBS current coupons and Treasuries have been getting narrower (MBS yields closer to Treasury yields).  These fires were fueled right through to the new year by speculation of MBS-related QE3's as well as the old cliche "more buyers than sellers."  Seriously though... In this environment with such low Treasury yields, who wouldn't want an almost equally risk-free return?  Demand for MBS has simply been quite strong, and production wasn't able to meet that demand.  So prices rose faster than benchmarks.  Here's a look at the long term spread between Fannie Current Coupons and 10yr Treasuries:

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