Another hard day of selling in the Treasury and MBS markets. The 10 yr note has breached a key level this afternoon, trading at 2.59%. Prior to the recent decline in rates, three weeks ago the 10 had very solid support at 2.57% and traded for almost two weeks between 2.56% and 2.50%, when 2.50% gave way it set off a huge amount of covering of short positions betting on higher rates, in turn rate fell to 2.44% in three sessions. Looking back now, based on how the market is trading it was mostly short-covering that drove rates lower. Once those shorts were out the 10 yr has exceeded its previous support at 2.56%. The technicals look bad at the moment; but let’s not jump overboard yet until we see what the ECB does on Thursday and the BLS employment data on Friday. The recent surprise has been the decline in rates more than the current increase in rates. It had been an almost certain belief rates were headed higher until safety moves over Russia/Ukraine came into play. That issue has ebbed for the moment. That the improvement was so short-lived implies the wider view is still there, that rates are likely to head higher. There has been little help from the stock market, it continues to hold very nice gains and hasn’t succumbed to any major correction yet. Federal Reserve Bank of Kansas City President Esther George said the Fed should allow its balance sheet to shrink before raising the main interest rate. She is not a voting member on the FOMC. Such an approach could imply the Fed will raise the benchmark rate earlier than it intends. Although news, there is strong opposition to that approach within the FOMC; nevertheless it was another excuse to sell treasuries today. At the Dallas Fed there is a position report that I have not yet read, but from what I have heard it brings forth the argument that keeping interest rates low and all of the QEs has had an unintended consequence; keeping rates low has kept consumer uncertainty high. As long as the Fed is sounding any alarm by keeping rates down, it is keeping consumers on edge and holding back spending. Tomorrow has a lot to chew through; the May ADP employment report expected to show 210k new private jobs; the May ISM services sector index (55.3 from 55.2 expected). Q1 productivity and Unit labor costs, the April US trade deficit and the Fed’s Beige Book. Also tomorrow the MBA weekly mortgage applications report, normally not a key report but with the recent decline in rates the data tomorrow should get more attention than usual.