There's some conventional wisdom that suggests asking questions in the title of an article is not a good idea. Pish posh! When it comes to financial markets, every day begins with a question mark. Today is no different, though the importance of the question at hand is questionable.
For each of the past 6 sessions, the closing yield on 10yr Treasuries (our proxy for "bond markets" despite the underlying focus being on MBS around here) has been no higher than the previous session. We can't say each day has improved because Monday and Tuesday closed at exactly the same levels.
What's with all the positivity?
First of all, it's not really that overwhelming considering yields were lower two weeks ago and lower again two weeks before that. Indeed the longer term range has been sideways to slightly higher (but mostly sideways), and the past 6 days have simply represented a move from the weaker end of that range to the stronger end.
There are several potential motivations for this apart from a simple bounce inside the range. One likely suspect is the Quarter-end reallocation of investment portfolios. Currently, it looks like some of the sharper moves in stocks have been well-connected with sharper moves in bonds.
Apart from that, there is also the matter of last week's FOMC events. They did shake things up a bit, but the effects are most noticeable for their disparate impact on yield curve constituents. That means that 2yr through 30yr Treasuries have been impacted in very different ways. If 2013 was the era for the longer maturity bonds to freak out, 2014, thus far, is the shorter end's turn. The implication is that some of the resilience or strength on the part of 10yr yields is simply due to the fact that they're NOT 2-5yr yields, as the latter have been hammered, relatively speaking:
In fact, the gap between 2yr and 30yr yields is approaching some long term sacred ground. It's already there, really, but it hasn't broken through to the other side yet. In the chart below, the yellow lines are a long term inflection point going back to 2004 (not pictured). Since then, every time this spread between 2s and 30s has broken through this sacred ground, it's spent at least a year on the other side. If it breaks through soon, it would be a bit earlier than a year this time, but still potentially significant.
The other way to interpret a run up to a major long-term inflection point like this is to say 'well, that was a good correction, and that's about as far as it will go.' We'll see how it plays out in the coming days.
As for today, there are only 2 pieces of data on the calendar, and unless they come in with crazy results, markets are probably content to get a majority of their guidance from ongoing month-end and quarter-end tradeflows. One never knows how much of those have already run their course. While we can hope for further inexplicable strength in bond markets, a 7th straight day of gains is uncommon.
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