The reflex rally we’ve been looking for later this week has arrived early.  The main driver behind this, beside the very oversold conditions on the chart, has been Asian and European buying of Treasuries due to worsening debt crisis issues in Greece.  Greece bonds have been imploding lately, now trading over 400 basis points higher than the German Bund.  Call it a flight to quality bid.

The only thing on the calendar today, besides 40 billion in 3 year notes on the block will be the 1:00  release of the latest FOMC minutes.  The risk in the minutes will be if talk is present about a changing exit strategy.  Interest and Austin mortgage rates continue to be bounced around like a pin ball.  With the fundamental and technical variables acting as bumpers, the ball is always a moving target.

Improving economic fundamentals are leading to higher yields and worsening Austin mortgage rates.  Heavy treasury auction supply is also a concern.  Sovereign debt problems are not only a Greek problem but are spreading though out the Euro zone.  Even Japan looks shaky as debt to GDP is 200%.  Stocks seem to be running low on fuel with many calling for at least a 10% correction.  Oil heading for $90.00 a barrel or in everyday life, $3.00 at the pump is a tax on the consumer.

No matter which poison you pick, this baby is tough to handicap.  We see the chart as just one element in our bias.  Notice how we broke out of the triangle pattern that began back in July 2009.  Once we pierced the 3.87% yield mark, traders recognized this as a breakout.  Risk projects to 4.25%.  In the short run, we like the fact that 4.01% was touched yesterday and held.  Trouble is, the reaction has been feeble and more to relieve oversold conditions, simply corrective in nature.  The bearish trend is firmly in place and suggests that after a short respite, sellers will be back in the market.

We will find support somewhere in the 4.0% to 4.25% yield level but to tell you where would be a fool’s game. With the tactical bias neutral to bearish, with higher yields the most probable, further selling should be limited given the size of the move we’ve already had.  As we speak, the 10 year note is up 6/32’s (yield 3.97%), mortgage backs up 6/32’s, and stocks off 9 points on the big board.

Hang in there.  Just like the dentist, it will be over soon!