Bond Markets Off Best Levels Following Economic Data
Much like yesterday's overnight session, bond markets drifted calmly and narrowly into stronger territory during Asian and European hours with 10yr yields bottoming out around the 6am hour. As if scripted, the appearance of pre-market domestic trading pushed yields and volume higher into the 8am hour.
Also like yesterday, we got a decent bounce into improved territory ahead of the cash open for stock markets, with lower prices out of the gate helping extend the bond market rally. From 9am to 10am, 10yr yields had moved from 1.80 to nearly 1.77, MBS from 104-13 to 104-19 (Fannie 3.0s).
But unlike yesterday, there was a lot of economic data this morning, not to mention the fact that it made for slightly better viewing in light of the fact that Fiscal Cliff news quickly shifted back from "progress" to "posturing" yesterday.
All of the data at 10am was economically bullish, with Philly Fed's big reversal into positive territory clearly leading the way for stock markets and bond yields to bounce off their lows of the morning. Since then, 10's are back up to 1.7875, equities are at session highs, and MBS are roughly 3/32nds off their 10am highs.
The question now becomes: is economic data enough of a motivation for this selling trend to continue in light of the looming possibilities of Fiscal Cliff headlines? So far, there's been some decent push back as stock markets over the past few minutes seem to be shying away from breaking overnight highs and Treasury yields have only retraced about 50% of their move from the highs to lows this morning (same story with MBS for that matter).
These developments speak to a market that prefers to be contained and cautious rather than pioneer new directional trends. With 1.80 as overhead support in 10's and 104-13 underfoot in MBS, we'd stay optimistic. If those defensive levels break down, not only would we be in negative reprice risk territory, but it would be the first serious challenge to the gentle but consistent rebound from mid-week weakness.