We’re watching CSPAN, waiting to see how the shutdown plays out. We think it goes into the weekend. Either way, finger pointing and bickering has hit a new low on the House floor.  We should be watching the Masters…..

9:10AM  : 
MBS Prices Fall as Treasuries Sell in High Volume
While 10yr notes paid much respect to their 3.56 target yesterday (indeed, this will remain an important technical inflection point given several recent support bounces), it was ultimately broken in overnight trading and that break is being confirmed in medium volume so far this morning, or rather, it’s at risk of being confirmed. The upside potential is that the hourly chart of 10’s will look “not to bad” with respect to 3.56 as a support level if 10’s manage to continue rallying this morning. That has been the trend so far as yields have come from 3.62 at 8:26am to 3.587 currently. However, the unpleasant potential is that we’d encounter yesterday’s high yields as potential resistance now. The extent to which that pans out seems that it will be dependent to some extent, on the stock lever (so far, it’s been to a “great extent”). Even this morning, TSYs finally put an end to the selling as stocks made their first “lower high.” As far as MBS, though they’re content to outperform TSYs into a sell-off, the overall weakness is more than enough to bring MBS lower, with FNCL 4.5’s down 6 ticks so far this morning at 101-06. The only data on tap this morning comes at 10am with the Wholesale Trade Report.

8:56AM  : 
No Agreement on Continuing Resolution. Rates on the Rise
Not much economic data on the calendar today. Investors are focusing on whether Republicans and Democrats can find a last-minute compromise on this year’s budget and avoid a costly government shut-down. We don’t see a short term spending bill reaching President Obama’s desk today, meaning the government will likely shutdown at midnight, but we do anticipate a Continuing Resolution to be agreed upon by Monday morning. Even with a potential government shutdown looming, SP 500 futures are 6.25 points higher at 1,334.75. The Nikkei jumped 1.85% after another earthquake shook the northeastern shore of Japan, killing two people and knocking out power to millions in the process. The stock lever has not been a supportive influence on the bond market lately. This relationship is all about the uncertainty that pervades markets amidst the deluge of economic data, headline news, geopolitical risk, budget battles, Fed Policy speculation, Treasury auction supply, and market technicals …just to name a few. The benchmark 10-year yield backed up another five basis points to 3.60% last night. Trading volume on Globex was heavy into the price decline with over 300k 10s trading as of 8:25am. That is well-above average and indicative of liquidative selling. The long end of the yield curve led the move higher in rates. The 2s/10s curve is 2bps steeper at 278bps wide. The FNCL 4.5 is -8/32 at 101-04. Current coupon yield spreads are tighter but loan pricing is going to be worse this AM, barring a total turnaround in the next two hours. The real headline in this market should be oil trading over $110/barrel yesterday and breaking through $111 last night. NYMEX light crude is currently +1.21% at $111.63. Rising oil prices fuel our call for another leg lower in interest rates as Main Street America sees spending money squeezed into the summer months. Gold prices keep rising on inflationary concerns; overnight they rose 0.92% to $1,470.89.

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