Bond markets had moved into a defensive position on Friday in order to account for geopolitical fallout after Sunday's referendum in Crimea. After the referendum overwhelmingly passed, the fallout has been less dramatic than markets may have been expecting.
While the US has already moved to impose sanctions on Russia (as expected), it has only amounted to a war of words and money. Military involvement was part of the concern that had been fanning the bond market rally, and it looks increasingly less likely at the moment. The more that continues to be the case, the more bond markets will have a significant motivation to unwind much of last week's rally.
The geopolitical market reaction doesn't exist in a vacuum though. Data is more prevalent this week and we had some this morning in the form of the Industrial Production report (there were other reports as well, but not market movers). It came out stronger than expected and added to the suggestion that weather hurt economic data in January, but likely eased in February.
Treasuries are pushing against their weakest levels of the morning while MBS are about mid-range, and only 2 ticks weaker on the day in Fannie 4.0s. The biggest issue at the moment is the inability to challenge Friday's levels. In fact there's a prominent inflection point between Friday's weakest levels and today's strongest, both in Treasuries and MBS. The longer we go without challenging that, the harder it will be to break.
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