Bond Markets Weaker Overnight, Consolidating At Current Levels
With Japanese Markets closed for the Spring Equinox, US Treasuries were forced to wait for European hours before starting overnight trading. Familiar themes persisted from then with all corners of the market generally following each other in unified "risk-on or risk-off" movement.
This time it was more of a risk-on start to the day, which has weighed on bond markets a bit. Cyprus is said to be in discussions with Russia to obtain a €5 billion loan that would mostly bridge the gap that the EU currently wants to bridge via Cypriot bank account levies. No definitive progress is reported, but "trying" is apparently better than nothing.
Markets fear a run on the Cypriot banks and a potentially resulting death spiral for Cyprus and beyond. Credit spreads in other Euro nations ARE NOT yet reflecting any doomsday scenarios, however. Furthermore, some small stop-gap possibilities are on the table that are soothing panic somewhat. First is the suggestion that Cyprus may not reopen banks until March 26th! That would certainly afford some time for pulses to slow and a more robust solution to be sought. Additionally, overnight (or early morning in the US) news suggests Cyprus is considering capital restrictions when it does reopen banks, much the same way that Iceland took steps to prevent a bank run.
Since the run on the banks is the fear and since both of these factoids seem to ease those concerns, here we are with Treasuries 4.4bps higher at 1.9477 and MBS 5 ticks lower at 102-30. We also wouldn't be opposed to the notion that we're entering into some sort of pre-FOMC consolidation pattern, but the correlation with European markets overnight suggests Cyprus remains the focus for now. Absolute highs in 10yr yields have been seen at 1.949, so we'd keep an eye on those for a break higher as a potential early indicator that MBS could face a retest of their lows (102-27 earlier this morning in Fannie 3.0s vs 102-30 now).