A nice rebound yesterday; the MBS market recovered slightly over half the price declines last Friday on the June employment report. This morning markets opened about unchanged in the bond and mortgage markets with US stock indexes up again in pre-market trading. Today there are no economic releases to think about; at 1:00 Treasury will begin this week’s borrowing with $32B of 3 yr notes. Recent Treasury auctions have seen less demand than the averages; with interest rate higher we will focus attention on the demand. Treasury three-year notes yield more than double their levels in May before the U.S. sells today. 3 yr notes generally don’t fit in our wheel house; we are more interested in tomorrow’s $21B 10 yr auction.

European Union officials meet today after finance ministers in the euro area agreed on an aid package for Greece yesterday. Reports today showed Chinese inflation rose more than forecast in June while producer prices fell for a 16th straight month, the longest slump in a decade. Yesterday began the earnings season for Q2; Alcoa, always the first to report, beat estimates and in turn juiced up the idea earnings in the quarter will remain strong. Interesting, most analysts a couple of weeks ago were predicting earnings would not be a good as in Q1.  Nevertheless the stock market is betting on strong earnings at the moment.

Today should be rather quiet compared the last couple of sessions. There are no data points, and tomorrow the Fed will release the minutes from the 6/19 FMOC meeting, always something to consider. While important, it isn’t as important as Bernanke’s speech tomorrow afternoon. After his comments about the Fed thinking about tapering led to interest rates spiking higher on 6/19 (since then the 10 yr note rate has increased from 2.17% to 2.64% at yesterday’s close and mortgage rates up 0.50%), he may try to ease the fears now dominating the bond and mortgage markets, but we will have to wait and see if he actually does.

Despite the rebound yesterday and so far this morning, everything is still pointing to higher rates and lower prices. As long as the US equity markets continue to attract investors there is very little reason for investors to move back into treasuries. The Fed fueled the most recent rally when the FOMC provided a positive outlook for economic growth and Bernanke said the Fed was considering winding down its market support. Our advice remains the same it has been for two months now; don’t fight the tape, those that ignore price action will continue to pay the price. Use any improvements as opportunities. Rates unfortunately are not likely to fall much from current levels.

- Michael Corboy