Banging Better Post-Close: Bonds had a blowout of a day with the combination of concerns over an array of credit worries, deflation talk and standard issue safe-haven buying all mashed up to send prices higher. The long end led the day with the yield knocked off to 3.35%  on the 10-year in light trade with players remaining sidelined and many calling the market technically overbought. The fundamentals continue to favor bonds, but the illiquid market leaves much of the moves if not directionally questionable, questionable in scope (boy, think this is bad? Wait'll next week). The 2-yr, while underperforming was able to knock the yield off to 30 year lows (Reuters). The day ahead could be another trip to Crazy Town, although some corrective action is possible, but with officials globally talking up treasuries as about the only safe instrument out there trade may be able to get the 10-yr yield to that 3.246% level. The curve was swung around with a much flatter bias, with the 2-10-yr yield spread heading out at 228.6. The buck is working higher at the close with the euro pulled back below 1.26 and eyeing 1.25 support while the yen aims for the 95 handle following a failed dollar attempt above 97. Spot gold is soft at 734.49 (-3.66) as is front-month crude at 53.64 (-0.75, spread to Jan 0.53). The calendar has initial jobless claims (8:30), leading indicators and Philly Fed (10). Fed gov Kroszner testifies at 10.

1976 Bad Year: The 2-yr on its screaming move higher knocked the yield to the lowest level since 1976, below 1.07% (Reuters) and tagging 1.06% (Bloomberg). The run went as the FOMC is clearly looking to go further on rates, while fed funds traders have bumped to nearly 20% for the chance of the rate to see a 75% basis point cut by the Dec meeting. The Fed's need for wiggle room in the near term however, seems to counter that possibility

Here We Go Again: Trade is heading back for the highs, with the short end now leading the way, or playing catch-up, even as stocks are trying to pull out of the toilet. The market is reaping some benefits on ramped up worries and the ongoing realization that the tentacles of the sub-prime mortgage issue have reached into virtually everything. The ongoing meltdown in financials is helping support prices, at the risk of being repeatedly redundant, volume is terrible.

Buck Re-think : The dollar stuffed the euro back into its range while the yen coasts toward its stronger boundary. Whatever flows were on board the euro break-out have been rudely awakened. Likewise, to convince the market of something more than just an extension of recent ranges the dollar will need to act soon as trade is clearly becoming impatient. The euro has support near 1.25 and 1.2450 with resistance near 1.28 and 1.2860. A close outside of that range will be needed to get a better read on direction. Against the yen, the dollar remains locked between 95.90 and 97.50. The pound has support near 1.49 and 1.4875 with resistance up at 1.5250. Spot gold went parabolic early in line with the dollar's dip and now trades a little under water at 737.19 (-0.96) while front month crude is off at 53.70 (-0.69, spread to Jan 0.44).

Clinging: Bonds were clawing back toward the highs, but they were screaming higher on the shorter dated stuff as they see more Fed-meddling. PIMCO's Gross is on CNBC offering expectations that the car makers will get some sort of bridge (to...nowhere?) and calling for further cuts out of the Fed. The 2-yr ran to yield 1.085%, looking to 1.05%as the next big thing, 5-yr saw 2.075% with a sub-2% in its sights. Stocks are holding lower, but look to be trying to sneak in some bids, which would drag on bonds some.

FOMC: The FOMC minutes showed the policy-posse isn’t on the same page on inflation/deflation while they are looking for unemployment in the 7.5% range in 09, while the GDP to see -0.2% to 1.1%. They acknowledge that current low rates bring on policy “challenges.”

Backing Off on Squaring: The market had taken another leg higher as stocks tank further, with yields off to levels last seen in the melt down of mid-03 on the shorter stuff, but have backed off on some position squaring. FOMC minutes will likely offer little to bonds, but equities will find something, anything, to rally off of.

Ratings Stuff :
Ambac was cut to BBB from A by S&P.
Chrysler's already soggy CCC rating was put on negative watch by Fitch.
(Bloomberg)

Pumped Up: Trade continues to get its safe-haven bidding while uncertainty and non-stop chatter out of officials' just clouds things up and worry shows up in many places. The ongoing stresses in the credit world have been ramping up even as cash injections and assorted bailouts were/are intended to grease the skids of lending, things are still tight and getting tighter. The situation is not good for stocks with cash being hoarded and even as innumerable talking heads scream "Buy!" and "Bottom!" buyers are either running scared or watching form the sidelines. Markets that had been considered, if not safe, at least less vulnerable, as the commercial mortgage world gets pulled down in to the hole.

Eyes On The Prize: Bonds have been bouncing better buoyed by data and sliding stocks, with a talk of deflation aiding the longer stuff while the short bills are still getting fast money coming in, leaving rates at recent lows. Trade has continued to be sloppy thin and players remain sidelined and cautious, coming in for a "few flips" a day here and there, but that's about all. Traders see further room to run, but the craving to run yields off to the mid-Sept levels on the 10-yr won't have much of a chance today, but it IS only about 14 basis points away, so doable. The market is also having fun with the ongoing financial circus based in DC, with the auto makers hand's out palms up while the plans already in place for bailouts still murky, and as WSJ's Gaffen noted late Tues BofA CEO "(who has...already gotten his share of the government's largesse, being such an important bank and what not), said...the ‘Big Three is one too many,' because ‘the American people aren't interested in just giving more money and not helping them change.' Physician, heal thyself. Everyone else can wait for the airbags to be deployed." The VIX volatility index has been trying to recover to Tues' highs, and will likely make a play for the 74.95 area while implied volatilities on bond options has held pretty steady on the session. The curve was whacked flatter with the 2-10-yr yield spread running 225.7. CPI dropped the most mom in 61 yrs, swear, while core fell for the first time in 26 yrs. Housing starts and building permits were crushed. The buck was coasting through the data when trade looked like it finally got tired of the week's tight ranges and blew them out not in its favor only to pull an about-face and send the dollar on a tear higher. Against the yen, trade barely budged. Spot gold is down at 734.25 (-3.90) while front month crude is off at 54.00 (-0.39, spread to Jan 0.39). FOMC minutes are out at 14.

The Race Is On: Treasuries are flying off the shelves, on the long end anyway, with the shorter stuff trying to play catch-up. The 10-yr is running the show having cranked prices up to knock the yield off 12.5 basis points on the session, while the 30 is flirting with sub-4%, reaching for an 8bps shave in yield. Trade could run out of steam here, with the weight of the extended run up being hampered by low overall volumes, but first they may go after the mid-Sept levels. The curve has flattened out hard back to late-Oct spreads.

New Issues :
DCP Midstream will sell $250M of 5-yr notes.
Nordic Investment Bank will sell 3-yrs.
Canada Housing Trust sold C$2B ($1.61B) of 10-yr notes. No details.
(Bloomberg)

Go Speed, Go: The market is clawing back to better levels, with stocks tanking again and trade still hampered by garbage for size. The 10-yr has been loitering around that sticky 3.44% area for a while, but could lose some traction into mid-day on squaring, but has the S&Ps under 840 as a support. There's little to slow things up, but supply continues to drag on the shorter maturities while the news may have been wrung out of the longer stuff with the overnight talk of bonds being the only safe game in town losing its glow. Technical players see things running "a little overbought" on 10-and-30-yrs, while Steve Orfanos of Orftech acknowledges "Picking a place to sell is tough," and is a little less gung ho on the 30's.

Back to Highs : The market suffered a little lack of conviction out the gate as trade grabbed profits on the overnight runup. Data did little for prices that were already looking lofty and that likely precipitated the move to the exits. But as the session progresses buyers have re-emerged. The 10-yr yield eyes 3.40%. The buck is taking back ground after getting side-swiped ahead of the open. But with the euro giving back pretty much the entire move, it's looking more and more like a head fake. Time will tell and trade will eye closing levels for a better read.

Hard Row to Hoe: The market has been all over the place, with the churning up and down somewhat dominated by the up. Traders say that the numbers (prices) can’t be trusted, due in large part to a lack of liquidity in normally extreme deep markets as well as just straight up uncertainty in terms of policy, regulation and paychecks. One longtime dealer notes that overall “markets are very sketchy. Any kind of price action is questionable,” though “things seem to be bottoming in stocks, commodities, FX…but ‘seems to be’ are the operative words here.” Another issue for players is the onslaught of “official” hearings and verbiage out of DC, which has served more to confuse than clarify as “panhandlers” and media…prostitutes make the rounds. As BMO’s Andy Busch noted this morning, “Need to get auto executives off the TV along with Bernanke and Paulson to have any hope of dissipating the bad karma.”

Hung Up on Highs : The continuous 10-yr futures contract is getting snagged at trendline resistance off Mar highs now near 119-04. Trade will need to break through this level to convince players that the move off Oct lows isn't just another head fake with the year's range still dominating. The overboughtness of the move will likely weigh and trade may need to take a couple of swings at the top to eventually chop through but it sure looks like motivation is there.

Cash from System : Fed drains $25B via overnight reverse repos.

Ticked Off But Now Bouncing Back: The market got hit as the dollar was clocked against the euro and most of the majors except the yen, and headed back to Fri's worst levels on the index. The 10-yr had bid early and pushed the yield through to 3.42% for a stretch and then churned lower before flipping with the buck's beat down and making new lows. Dealers are hearing talk of "another coordinated rate cut," however, so a renewed bid should come into play but supply on tap and the FOMC minutes still due will add drag to prices. The market will likely get caught up for a while in limbo, with the 10-yr tracking back near the sticky 3.44% yield level. Traders are also seeing "fly-by" runs on markets, with the "severe illiquid situation" making it easier for a player with deep pockets to run a market, even in spaces as deep as the currency and bond world

Ranges Giving Way : The dollar's boundaries were getting tired and trade looks to be either widening them or choosing a new near-term direction. While it's too early to call, the dollar's move out its comfort zone looks to have some force. With little guidance from data and stocks beyond weakness, the currencies could be taking things into their own hands. Volume remains suspect but should the unwinding of buck positions find some legs, size should return. The euro has support near 1.2560 and 1.25 but resistance near 1.27 convincingly removed trade eyes 1.2860 and 1.31. A close above 1.2860 would help bolster the case for a bigger run to 1.33. Against the yen, the dollar remains snagged between 95.90 and 97.50. A close anywhere out of that range might actually be meaningful, directionally. The pound sliced through its upper boundary near 1.51 and now stares down 1.5275. Spot gold is chopping higher at 741.07 (+2.92) while front month crude is trying to rally at 55.07 (+0.68, spread to Jan 0.40). CPI was way down as were housing data but the buck really didn't care. Instead, trade kicked into high gear ahead of the equity open with rumors of coordinated rate cuts and hedge fund demand for everything but the buck both making the rounds. Trade will eye the early move for follow-through and whether or it can be held through the close.

Back Off: The market is giving back some ground with some supply in the pipeline weighing even as the S&Ps hang not too far off the oft talked about 840 level (closing only below in late Oct). There has been a slight uptick in size, but as recent experience has shown, that will likely be fleeting. Traders remain along the sidelines and many are said to be trying to "protect a year" with paychecks on the street in question.

Data Done: The market was geared up for bad data, with the exception of CPI, which hit at -1.0% headline with ex-food and energy as expected -0.1%, the biggest drop in 61 years according to CNBC. The housing numbers showed starts better than expected at 791K from an upwardly revised 828K for Oct (on the strength of Bob the builder) while permits tanked to 708K from an upside revision of 805K, which is a decades long low (Bloomberg). The bonds gave back some of the early gains but are retaining the bid, while the curve saw a twitch of unwinds send it a touch steeper.

Night Flights: The market got a boost overnight with the flight to quality leaking out the curve to the longer stuff as inflation fears subside. Supply hits next week on the short stuff (2's & 5's) and that could be draining some of the bid. Globally bonds were bid on plummeting stocks and in anticipation of another round of aggressive policy easing. That sentiment looks to carry over to today's session amidst the backdrop of desperate pleas for a bailout of autos and still horrible housing data due. But CPI might be a bright spot for all. The 2-10-yr yield spread is ripping flatter at 230 as curve trade is unwinding some steepness and may be positioning for some bull flattening on diminished inflation fears and continually weak data. Bond prices in the EuroZone and Japan soared with stocks getting crushed and increased probability of rate cuts. Treasuries are expecting a soft CPI number. Any upward surprise could take a serious bite out of the bid. Housing data also hits but any surprise there would have to be to the upside as most expect a bottomless pit. The 10-yr yield has sliced its way through mid-Oct lows near 3.48% intraday and now eyes 3.40%. Trade has found some room to run this week but with trend price highs not too far off, profit taking might provide some headwind. The yen has caught a bid as stocks are back under pressure globally, looking to get back through 95.00 on the buck, while the euro has been showing a slight recovery against the buck, but remains mostly range bound. Gold has been steady to lower into the open with spot running 736.69 (-1.46) while crude continues to get hit in front of inventory reports with the front month, expiring Thurs, now 53.65 (-0.74). Data due has CPI, housing starts/building permits (8:30) and the FOMC minutes (14). Fed-speak has gov Kohn (9) and Richmond's Lacker (13:30).

Mortgage Applications : The weekly MBA mortgage applications index dipped 6.2% last week with refis up 2.6% but purchasing applications down 12.6%. The fixed 30-yr mortgage rate dropped to 6.16% (-7 basis points) while the 15-yr fell to 5.87% (-3 bps) & 1-yr adjustable rate mortgages rose to 6.80% (+3 bps).

Table of overnight activity in the financial markets.

Thanks Hank. Ben. Guys: The market had settled down some into the close, but was still well bid in slow trade.  The day saw a fairly tight range for the early part of the session and busted out later with the 10-yr leading the way through the day. Trade got a little wound up in momentum when stocks were falling, but caught further interest after pushing through some recent barriers. The 10-yr managed to push higher to knock the yield off to 3.509%, getting an added kick once the latest housing measure hit the lowest in record going back to 1985. Data and assorted bond positive news kept things buoyed while the circus of the House/Bernanke/Paulson show wasn’t exactly the epitome of a crew with a secure, working plan. Volatility saw another push higher as the VIX index traded back up through 73 with expectations for ongoing volatility obviously on the upswing.  The day ahead offers some potential, with inflation expected to remain tame, housing to continue to deteriorate but minutes on the Fed’s Halloween meeting are unlikely to spook and more likely serve as a confirmation on the market’s sentiment. The curve saw a solid twist flatter, turning some on unwinds late and sending the 2-10-yr yield spread out at  239.7, while the 3-mo-10-yr pushed hard back to near last week’s flattest levels. The buck is bumping toward the better boundary of its range this week on the euro while the yen firms. The dollar remains locked down as trade lacks a catalyst. Tomorrow's calendar has CPI, housing starts/building permits (8:30) and FOMC minutes (14). Fed gov Kohn (9) and Richmond's Lacker (13:30) talk.