Mortgage bonds are down about 140 basis points as of 11:50am PT, which is worse than an already bad day until now. Rates were already up about .25% today alone, and if this latest drop holds rates could go up a bit more—rates drop when bond prices drop in a selloff; lenders watch mortgage bonds then adjust their consumer rate sheets accordingly. The selloff started with an announcement that Obama would extend Bush tax cuts which was seen as good for the economy, so stocks rallied and bonds sold. Then the 3yr Treasury auction was not well received and bonds sold more. And as previewed in our WeeklyBasis report 12/4/10, Chinese inflation has taken center stage as a concern for bond markets. That report noted rates rose .625% since October 8, and now they’re up .875% from that date to current trading today. There are more Treasury auctions tomorrow and Thursday: $21b 10yr notes and $13b 30yr notes respectively. More bond supply might cause more rate pressure. More to come.