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Bond Markets Weaker Overnight as Risk Trade Shows Signs of Fatigue
Posted to: Micro News
Wednesday, August 28, 2013 9:24 AM
There are no satisfyingly singular headlines to account for the bounce higher in Treasuries yields overnight. Rather, it's a combination of factors that we've been discussing for several days, in addition to the "signs of fatigue" in the geopolitical risk trade.
The factors over the past several days include:
- The technical trading patterns in Treasuries that suggested a potential consolidation was in the works even before the Syria situation flared up.
- The reluctance of domestic bond markets to follow most other markets experiencing a 'flight-to-safety' trade.
- The fact that yesterday marked the best 4-day winning streak for MBS since mid 2012.
The technical resistance level at the 5-yr moving average being sought out by 10yr yields yesterday.
- The generally thinner-than-normal trading conditions plaguing summertime weeks, making it easier for markets to change on a dime.
- The fact that bond markets appeared to simply be grudgingly acquiescing to the flight-to-safety rally--potentially using it as a "hide-behind" for a move they probably would have made anyway after hitting multi-year high yields last week.
Most recently, we have equities markets flatlining overnight. Of course it could be the case that more losses are in store, but for now, this is the first time in the two days of exceptionally brisk selling (ostensibly related to Syria) that S&Ps have hit a a low and stayed there for more than a few hours (1627.75 in S&P futures currently vs 1627 at y'day's close).
Bond markets are definitely pouncing on these early signs of the flight-to-safety rally running its course. Overnight headlines discussing the 2 day timeline of bombings in the works adds to the sense that the "world police" countries aim to reprimand Syria as opposed to start a war.
Add to that the meaty part of the auction cycle arriving today and bond markets are more than justified in lifting off the accelerator if they weren't already by everything else mentioned above.
MBS are expressing their sympathy with 9 ticks of weakness so far, bringing Fannie 4.0s down to 103-07. 10yr yields are up to 2.76 and we once again must contend with the 2.74-2.75 levels potentially acting as a pivot-point. Pending Home Sales is released at 10am and the 5yr Auction hits at 1pm.
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