Treasuries and MBS rallied ferociously today after elections in Italy turned out (or "are turning out" since they're not done yet) to be very different than market expectations. Long story short, Pier Luigi Bersani was expected to win both upper and lower houses of Italian Parliament, even if only by a small margin. If that happened, it would have been as close to a status quo as possible--one that would have been the best possible outcome for broader EU stability considering the performance of Italian spreads since Berlusconi was ousted in late 2011. Instead, Berlusconi himself looks to have won at least one side of Parliament. Not only is this counter to expectations from yesterday and beyond, but it's also counter to the first polls from as recently as this morning! Bond markets were always likely to rally if Berlusconi won, but the shock and awe added fuel the face-melting fires. MBS had their best day since the QE3 announcement and 10yr Treasuries had their best day since early November, with huge volume to back it up. Now for the caveat: further volatility is possible and markets currently look to be pricing in the fear that Italy won't form a government. If something else proves to be the case by tomorrow morning, we could be bouncing back. It's like a heavy snow the night before a school day and we're the elementary students hoping for a snow-day. We could wake up tomorrow to a winter wonderland or to bone-dry pavement. Admittedly, something in between is the highest probability.
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