Results of the first leg of this week’s auctions (2 year note) just hit the tape.  Yield came in at .88%, Indirect Bidders took only 11%, and the bid to cover was 3.13 to 1.  The issue also had a 1 bp tail.  This was not an aggressive auction so we’ll give it a C.  Post results, the market pulled back and briefly when negative on mortgage backed securities.

Currently, the 10 year note is up 2/32’s (yield 3.62%), mortgage backs up 1/32nd, and stocks plus 73 on the big board.  Trading is a little spooky right now as Wall Street dealers fear there might not be the sponsorship for Wednesday and Thursday’s longer duration auction paper ( 5’s and 7 year notes).  We also have the FOMC statement tomorrow and the State of the Union speech so buckle up, this thing could get slippery.  Earlier today, Consumer Confidence was out with a print of 55.9 (improvement) and the Case Shiller Home Price Index was down 5.3% (as expected).

Earlier than that, the wheels were churning across the pond as Italy, Greece, Spain, Portugal, and now Japan are struggling with their sovereign debt.  S&P just put Japan on the negative credit watch.  With China putting the brakes on bank lending, the mood outside the U.S. is tentative at best.  On the bright side, Barclay’s has issued their indices for month end extensions, a measure that fixed income funds must conform to per their filings.  The extensions are larger than expected so in English, this will be supportive of mortgage pricing until at least Thursday afternoon.  Technically, the high today approached the 62% retracement level of the November/December selloff (188 11 in futures/ 3.56% yield on the 10 year note).  We failed to take that level out and have now backed away.

Not to rain on your parade but this failure could be the start of a new corrective phase.  Your key will be if yields on the 10 year note print 3.65% or higher.  On the bright side, daily oscillators are still posting positive readings and holding above midrange levels.  All good things for those that want lower mortgages/better pricing.  Just want you to know that this baby is like herding cats so keep both hands on the leash!