I remain concerned that the US economy isn't what it is touted to be. A lot is made about the unemployment rate down to 6.6% but the jobs created are at the very low end of the pay scale. The unemployment rate is a statistic that can be what the Fed and Wall Street want it to be, but if the Fed really believes this is a normal economic recovery its memory must be exceptionally short. The housing sector is slowing; might be the weather but unless incomes are on the rise (and they are not) affordability is declining; first time buyers amount to just 26% of mortgage applications. For all of the Fed's support with QEs and monthly purchases the recovery is the slowest seen since the Depression. Keeping interest rates low as the Fed is doing is working against the Fed's inflation target at 2.0% and adds to the slow growth, there is no reason to rush to buy; in fact deflation (if it gets a grip) will make it more advantageous to not spend. Most every economist and every Fed official will deny to their deaths that they are concerned about deflation but that doesn't mean they don't worry about it---just won't admit the possibility. I suspect these are a couple of issues now bothering investors.

Treasury sold $32B of 2 yr notes this afternoon; it was a good auction but doesn't really have influence on the sector of the market we are focused on---the mortgage market and long dated treasuries. The rate at the auction 0.345, bid/cover 3.60, indirect bidders took 34.3% while direct bidders got 19.2%. What made the auction strong was the bidding. Last month's auction drew 0.380%, 3.30x bid/cover, 28.4% indirect bidders, 22.3% direct bidders; 1 the last 2-auction averages: 0.323%, 3.30x bid/cover, 24.7% indirect bidders, 23.0% direct bidders.

Tomorrow at 10:00 Jan new home sales, expected down 3.4% to 400K units (ann.). Existing home sales, released last week were weaker than expected. At 1:00 Treasury will auction $35B of 35B notes and $13B of 2 yr floating notes.The technicals are still holding bullish biases, but as noted they are more neutral than outright bullish. It depends on the stock market in the next few days whether the 10 and MBSs will contend to improve. Stocks are slowing, unless the S&P can make a new high---and hold it for a couple of days, we expect another round of selling that will in turn improve interest rates. Traders in stocks and bonds likely will be reticent tomorrow ahead of Janet Yellen's Senate testimony on Thursday.