European Close Cools Bond Rally, But That Can be a Good Thing
After we saw the second leg of this morning's bond market rally clearly being driven by Europe, the possibility existed that momentum would dry up as the European session ended at noon Eastern. Indeed high noon marked high prices for US bond markets including MBS.
So far, there hasn't been an unpleasant bounce back in the other direction. That leaves us with the best situation for an NFP-Friday Rally: a smooth leveling-off into the afternoon.
Why is it a good thing for prices to stop going higher?
1. Volatility is a net-negative for rates. While volatility that pushes prices significantly higher will certainly help rate sheets improve, fewer gains will be immediately realized than if prices take the slow and steady approach.
2. Given the choice, lenders who are going to reprices would prefer to do it once and be done with it. As such, a pull-back or 'leveling-off' in prices provides a perfect cue to pull the trigger on a reprice that may have been on hold while prices were still rising.
Case in point, a majority of the day's reprices have come in during the past hour and if you haven't seen one yet, it remains a distinct possibility.