The first trading day of the week is off to a slow but positive start.  Although the 10 year note is down 2/32’s (yield 3.79%), mortgage backed security spreads have tighten, posting gains of 5/32’s on the day.  Stocks have been of little help, waffling on either side of unchanged all day.  No news this morning but the calendar will heat up as we move towards the end of the week.

Of particular  importance will be the Housing data on Wednesday and Thursday, followed by 4th Qt. preliminary GDP on Friday.  The treasury auction calendar is in full swing with 126 billion up for grabs, starting tomorrow with 44 billion of 2 year notes.  The good news here is that all the paper is shorter in duration (2 year through 7 year) which should have better appeal to the investor community then the debacle 2 weeks ago.  Another key to market direction this week will be Sir Ben’s testimony before the Humphrey-Hawkins group on Wednesday and Thursday.

We expect him to manage his speech and question/answer period back to “core” Fed values, emphasizing low mortgage rates for and extended period and no assets sales until some sort of economic recovery is well underway.  The technical view of all this mumbo jumbo is to stay defensive, selling rallies into auction supply and Sir Ben.

Intraday charts have improved but the lack of strong gains and bearish readings on daily charts suggest that the market is corrective in nature.  If our work (and that of others ) is correct, we would expect a larger bearish move (more selling/worsening mortgage pricing) in the days ahead.  To avoid another leg down, we need to close below 3.74% on the 10 year note (end of day close).  Best to keep both hands on the wheel.

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