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Bond Markets Surge Overnight, Dialed Back, but Gaining Again; MBS Underperform Horribly
Posted to: Micro News
Friday, August 8, 2014 9:46 AM

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All that discussion we've been having on the unwillingness of MBS to participate in a geopolitical flight-to-safety is coming to an ugly head this morning.  Fannie 3.5s are struggling to hold even the most modest gains while Treasuries rally to 14-month lows. 

Here's a play-by-play of the overnight rally and early morning correction:

  • Obama announces air strikes in Iraq, 10yr yields fall to 2.38 in Asian trading
  • European trading opens and bonds rally more.  German bunds hit high 1.02% range.  US 10's fall to 2.349
  • Market rout fizzles as equities were unwilling to go much lower, reversal was gentle at first.
  • Then news hit just before 8am that Russia is ready to mediate talks between Kiev and East Ukraine.  The reversal picked up steam and 10yr yields were back up to 2.41
  • The reversal has since leveled off and yields are back to 2.39. 

Through it all, MBS are underperforming horribly with Fannie 3.5s up 5 ticks compared to the 11 ticks of price gains in 10yr Treasuries.   Economic data is present, but largely unimportant today.  Bond markets are fighting battles based on jockeying of trading positions and technical levels.  Beyond that, they're in tune with European markets for the next few hours at least.

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