Bond Markets Weaker Overnight, but Recovering Into Domestic Session
Global markets continued moving back toward 'risk' overnight as the Crimean referendum has merely resulted in economic sanctions so far. Part of the preemptive bond market strength last week had accounted for potential military escalation on the part of the US and EU. The longer we go without such escalation, the consequences will look increasingly limited to 'sanctions'--notably less problematic than military escalation.
Spiking equities and bond yields into the European session reflect this reality. 10yr yields moved as high as 2.6831 overnight, but have eased back to 2.67 so far this morning. MBS also recovered after starting in weaker territory with Fannie 4.0s down only 2 ticks on the day at 104-12. That said, we're seeing early signs of technical resistance at the morning's best levels. This could turn out to be a minor speed bump or a barrier that lasts all day. It's too soon to know just yet.
The fact that bond markets are only in moderately weaker territory reflects some disbelief of the anticlimactic geopolitical developments. Such disbelief is justifiable at present, but longer we go without consequences more severe than economic sanctions, the more pressure for bond markets.
A complete absence of Ukraine-related flight-to-safety flows would probably have 10yr yields in the 2.72-2.76 neighborhood. So at 2.67, bonds still haven't let their guard down and moved on.