Big Improvements Overnight Moderating Into Domestic Session
It's another data-free session and global financial markets have taken the opportunity to freak out like it's going out of style. Risk assets were pummeled relentlessly and safe-havens experienced mind-bending improvements. For instance, 10yr yields, who--a few days ago--were facing resistance at 2.82, fell all the way to 2.706! All of this has been in lock step with stocks, Yen, and 47 other polarized risk assets.
The above chart of Treasuries, S&P, and Yen is a few minutes old now. They've all bounced in unison, but just slightly. Point being, we can't yet conclude that the mind-bending move lower is unequivocally giving way to a mind-bending move in the other direction.
Then there's MBS. Poor old MBS are just now barely breaking above yesterday's highs (whereas Treasuries haven't been in yesterday's territory at all since before 3am). As we discussed yesterday, MBS just can't and won't keep up with Treasuries into these risk-off moves.
The highest probability bet for the rest of the day is for bond markets to continue following stocks et. al. The overnight rally was very opportunistic, and the fact that it deviates so far from expected ranges means that trading positions get forcibly "stopped-out." In other words, anyone with a trading position that benefits from higher rates is forced to become a buyer at some point if rates move far enough lower. That phenomenon (forced short-covering) along with simply algorithmic buying due to technical tripwires being crosses, is happening en masse today. When this panic has run its course, there's a risk the opposite will happen en masse.