Bond Markets Weaker, But Not Because of China
There was stronger economic data in China overnight. Unfortunately when it comes to interest rate news, Chinese economic data gets way too much credit. It was not a market mover last night as Treasuries merely drifted sideways to slightly higher. Chinese equities indices rose handsomely, but none of it translated to other markets. Even the Nikkei fell into negative territory.
A far bigger impact was felt from the reaction to UK inflation data (from their central bank). The data pointed toward lower inflation, which would normally be good for rates. But because this report is also an opportunity for the Bank of England to signal more accommodation to prevent disinflation, and because the Bank of England did no such thing, bond markets were none too happy. Moments after improving due to lousy Eurozone Industrial Production data, European bond markets turned around and went higher in yield, pulling US Treasuries along for the ride.
More than a runaway sell-off, the late overnight events made for slight weakness and increased volatility. It's left 10yr yields another 3.3bps higher this morning, now at the critical 2.75 level. Perhaps there's some extra hesitation before today's 10yr auction, but not only won't we know until 1pm, we'd still be waiting for tomorrow's 30yr auction before seeing any sort of 'relief bid' in bond markets due to the auction cycle being over (a week of Treasury auctions brings extra supply to the supply/demand equation. Markets know it's coming, but it's still thought to have a temporary upward effect on rates as traders make sure they leave enough room in portfolios to accommodate the supply).
The translation to MBS has been minimal, with Fannie 4.0s down only 3 ticks so far. That is AFTER last night's roll, which made prices another 11 ticks lower yesterday after the close. That 11 tick drop has no effect on pricing.