Econ Data Ignored in Favor of Auction Prep. Lack of Liquidity Creates Chopatility

Liquidity is thin and price volatility has picked up this morning after yesterday's well-attended 10yr TSY note auction.  There are all sorts of factors to consider as to why this is happening but those explanations seem far less important in the "here and now" when compared to how today's 30yr bond auction is received. The thing is, it probably doesn't need to be a super strong auction for the bond market to maintain its slightly bullish bias, which was created by a disappointing Employment Situation Report last Friday. As long as it's not a horribly weak auction that leaves the street bloated with inventory, we don't see the market offering outright suggestions that would be indicative of higher yields in the aftermath. Then again we don't see any major indications that the bond market is ready to make a rapid run toward lower yields either

What we're basically saying is, barring a sloppy auction followed by a sloppy distribution trade, the basic premise that another round of auctions are behind us should be enough motivation to lead real money investors to wave in a few buy orders.  That would be a good thing for mortgage rate watchers as it would likely prompt a return to the lower levels within the recent range. Notice we did not say breakout of the recent range...just retest the lower levels which would create the opportunity for a move lower in rates.

Speaking of ranges, 10yr yields failed this morning to break into sub 3.35 territory, sending yields promptly back toward the trendline we highlighted yesterday.  Yet again, we are seeing disregard for 3.37 and we hope the same trendline continues to be pertinent, except this time, to provide a supportive bounce closer to the 30yr auction results.

Once again, MBS are playing things a little closer to the hip than treasuries as the latter copes with a bit more volatility due to auctions.  Still, MBS don't much care for volatility, and MBS price levels don't much care for rising benchmark yields.  4.5's have managed to stay near unchanged, but current levels are down about 3 ticks from highs this morning. Production MBS coupons are still outperforming though and we remain hopeful that real money buyers will be looking to add MBS positions outright after the Treasury auctions (or right now).

Here is a run down of all the econ data that the market seems to be ignoring this AM in favor of the impending auction resolution....

• Weekly Jobless Claims Rose to 445k from 410k previously (consensus 405k). 
• PPI was slightly higher than expected on the headline (1.1 vs 0.8) but the Core excluding food and energy was on the screws at +0.2
• Trade Deficit Smaller Than Expected at 38.31 bln vs consensus of 40.50 bln.  Exports up 0.8% and imports up 0.6%

If you haven't seen it yet, remember that all the morning's data releases are available on MBSonMND right when they come out, as well as frequent market color from AQ and myself, not to mention the live flashing price tables and live updating charts of MBS and treasuries. Here's what you missed in live updates this AM (each headline expands to a full story, as shown in the top line)