Is European trading having an outsized effect on the domestic bond market?  The past two sessions would seem to suggest this.  Yesterday, bonds rallied together before US markets pulled back in the other direction after Europe closed. 

Today's dynamic was the same, but in the opposite direction.  In both cases, Treasuries have seen a bit of a 'pop' just before 1pm, as if they were released from some previous obligation and could suddenly do what they please.  This will shortly be marked up on the dashboard chart of 10yr TSYs.

Whatever the case, the important part is that MBS are back in positive territory and any earlier negative reprice risk is effectively off the table.  Fannie 3.5s are up 1 tick on the day at 102-17.  10yr yields continue to hover around 2.47.

MBS opened 5 ticks weaker after Treasuries spent the overnight session moving steadily higher.  As has been the case of late, stocks and bonds continued moving together, but this time back toward riskier territory.  Of particular note was the move higher in German Bund yields as it's basically another bounce at all time lows.

The morning's only 8:30am data--CPI--has marked a turning point in the weakness.  In fact, Fannie 3.5s just made it back to positive territory 10 minutes after the data.  10yr yields are down from 2.505 to 2.478.  Here's the run-down:

• June CPI +.2573 vs +.3 forecast
• Core CPI +.1291 vs +.2 forecast
• Food +0.1, Housing +0.1
• Inflation-adjusted average earnings +0.0 vs -0.1 previously

This reaction is very important because it's by far and away the most pronounced response to CPI data in at least 4 years.  And for most of that time, it was an utter non-event.  In other words, we knew the day would come where markets would begin tuning back in to the price index data series.  Although we've noted a slight uptick in interest in recent months, today's leaves nothing to the imagination.

In today's case, it looks like some market participants are/were defensive about the possibility that inflation could come in stronger than expected.  The simplest conclusion is that they're increasingly expecting changes in Fed policy based on inflation metrics.  That stands to reason considering the other half of the Fed's mandate (employment) is already showing the steady improvement needed in order to consider raising rates.  The more inflation we see, the sooner the Fed is seen raising rates.  As a final exclamation point on that thought, short end rates (those most tied to Fed Funds rate) are in positive territory while 10yr and 30yr Treasuries aren't quite there yet.

In the first hour of cash trading, equities markets had been choppy and slightly weaker.  They took a sharper nose dive about 5 minutes ago and bond yields followed.  In general, the stock lever has been fairly well connected as bonds don't have much else to go on today.

10yr yields are down 3bps now at 2.453 and Fannie 3.5s are up 6 ticks at 102-19.

MBS are 4 ticks (.125) higher now vs their weakest levels around 12:40pm.  10yr yields bounced back into the 2.48's.  While this could always turn out to be a temporary pause in an ongoing trend of weakness, it's slightly more than a random movement for now, and one that decreases the negative reprice risk that had been increasing until now.

Some lenders may already have those balls in motion, but others that were on a fence may now be holding off.  All that having been said, it's not the kind of bounce that's anywhere close to tipping the scales toward positive reprices.  Point being: if you were going to lock today, we're not seeing any reasons to wait.

At 3:11pm, Al-Jazeera reported the Israeli Army launched a large-scale ground, air, and sea offensive on the Gaza Strip.  It took bond markets several minutes to figure out what was going on (stocks even longer), but as the story came into clearer focus, both sides of the market took off (stocks and bond yields lower).  Israel's Prime Minister released an official statement confirming the ground offensive. 

The rally carried 10yr yields through the important 2.47% level.  Although Treasuries technically mark the end of their trading day at 3pm, this is one of those cases where we  could justifiably wonder if the market activity wouldn't have been the same if the headline came out before 3pm.  In other words, 10yr yields officially closed above 2.47, but the move into the 2.45-2.46's isn't inconsequential.

MBS have done their best to keep pace with the Treasury rally, but as is always the case with geopolitical risk rallies, Treasuries outperform.  Still, MBS are up 12 ticks on the day now at 102-15.  Positive reprices are incrementally more possible than they were at the last update. 

The one glaring caveat for all this is that as soon as there's a turning point in geopolitical risk, the turning point in bond markets can be swift.