MBS MID-DAY: Bond Markets Continue Pouting Ahead of 7yr Auction

The last potentially notable event on today's calendar is the 7yr Treasury Auction coming up at 11:30am.  7yr auctions aren't typically something markets care much about, and today's is only really worth mentioning on a relative basis--that is to say, 'relative' to the barren wasteland that is the Christmas week trading environment.  In such an environment, Treasury auctions are one of the few things that FORCE a certain pre-determined amount of bond market volume to be transacted.

That's why yesterday's 5yr auction caused as much of a stir as it did.  It exposed a fragility in the thin conditions.  Even after a significantly weaker morning, the yields still weren't high enough to attract more than 2.39 dollars bid for each dollar auctioned--right in line with multi-year lows.  Considering 7yr auctions are even more challenging for market participants (not a big market for 7s), the safest play was to sell, sell, sell.

At least today's selling has been more moderate by comparison.  Fannie 3.5s are down only 2 ticks at 103-20.  10yr yields, unfortunately just cracked 2.30.  Refer to this morning's Day Ahead for thoughts and analysis on that broader weakness.