MBS MID-DAY: 3/12/2012

(Reuters) - Euro zone finance ministers will sign off on a second bailout for Greece on Monday and shift their focus to Spain, whose government looks set to violate newly agreed EU budget rules by missing its deficit target again this year.

Greece, the bloc's original problem debtor, swapped its privately held bonds at the weekend for new, longer maturity paper with less than half the nominal value, slashing more than 100 billion euros ($130 billion) from its debt.

The swap paves the way for euro zone ministers to give the final go-ahead to a 130-billion-euro package to finance Athens until 2014, after they decided on Friday that Greece - its economy shrunk by repeated austerity measures - had met all their conditions.

But as Greece's financial problems have lost some urgency, Spain has raised a new challenge. After announcing the previous government had missed its 2011 budget deficit target by a significant margin, the new administration added it would not meet the EU-agreed deficit goal for this year either.

"Spain will be subject to serious discussion today, both because of the method and the substance of their announcement," said one euro zone official involved in preparing for the ministers' discussions.

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As expected, the trading day has been excruciatingly slow today. The culprit, apart from a natural predisposition for Mondays to be a bit more thinly traded than other days of the week is an exceptionally light economic calendar on an otherwise busy week.

With no meaningful data this morning, the best candidate to catch traders' fancy is the Fed's scheduled buying in the 30yr sector, beginning at 10:15, but with higher volume movement more likely occurring after it completes at 11:00am.

Beyond setting up for that, markets have been reacting somewhat to China reporting their biggest trade deficit since 1989. This helped fuel a bit of a bounce back from Friday's weakness, along with the general counterpoint arguments casting doubt on the efficacy of the Greek PSI along with the low volume.

All this leaves 10yr yields nearly 3bps better than Friday's close at 2.005 and Fannie 3.5 MBS up 5 ticks at 103-14. 10's were as low as 1.989 earlier this morning (hence the the "2 steps fwd") and MBS as high as 100-16 before retreating a bit since 9am ("1 step back").

Keep in mind that the auction cycle is a day early this week and we could see traders begin setting up for tomorrow's 10yr Notes today. The best candidate for volatility is the 11am completion of the scheduled Fed buying. If we weren't so determined not to be surprised by bond markets holding ranges, we'd probably be surprised to be seeing things trade so well this morning and a bit wary about that changing after 11am.