Rough start to the holiday week as stocks are flying high and bonds, notes, and mortgage backed securities are taking all the punishment.  The selling stems from a better bounce in risk assets (stocks), Asia and Europe swap selling, and a WSJ article about “Rates may rise sooner than you think.”   Seems like a collection of lame excuses for a market that simply lacks liquidity.  The bias is for a trade on the 10 year between 3.54% and 3.63%.  With the note currently down 21/32’s to yield 3.63%, a bottom may be in the making but as of yet, cannot be trusted.  As a matter of fact, the 10 year note is very oversold, reaching yields not seen since August.  The 2 year note over 10 year note spread is now at 280 bps which is historically wide.  The combination of Ben Bernanle and his supporters (cheap money for an extended period of time) and inflation fears/economic growth on the horizon have teamed up to create this super steep yield curve.  No news today but Tuesday, Wednesday, and Thursday, will give us more than we asked for in a holiday shortened week.  Technically, the down trade (selling) has ended its parabolic decent, reaching levels that are attracting some buyers and fast money bottom fishers.  However, we expect a limited recovery as fixed income traders have a mind set of selling strength.  With the bears firmly in control and next week’s auction paper (2 year, 5 year, and 7 year notes) laying in the weeds (who’s going to buy it?), best bet is to stay defensive into year end.

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