Even seasoned market-watchers might be thrown for a bit of a loop by today's surprisingly strong bond market rally.  After all, we just had a surprisingly strong bond market rally yesterday, taking 10yr yields below 2.57 for the first time this year, and now this morning, they made it all the way down to 2.473, matching the lowest level since last July.

It might not be too much of a puzzler had the 8:30am economic data been extremely poor, but it was quite the opposite.  The data unequivocally pointed to weakness for bond markets.  In fact, that's precisely what we had, but only for the first few minutes. What's up with that?!  Why did it turn around? 

Here's a simple breakdown:

1. Today provided an opportunity to assess whether bond markets are more interested in economic data or other considerations such as European Central Bank (ECB) Policy.
   1. Recent bond market movement gives us reason to believe that ECB policy is one of the driving forces.
   2. The gist of that news is that the ECB essentially promised 'action' 1 week ago.  EU bond markets have been outperforming ever since, meaning their yields have been falling compared to US Treasury yields.
   3. We've also had days where movement in bond markets worldwide is clearly connected to news concerning this probable policy shift, especially yesterday and the day before
   4. In addition to monetary policy, geopolitical risk is also having some positive effect on European bond markets.
2. US Treasuries and EU bond markets don't go much farther apart than they were yesterday and the day before.  Because of this, we said that any further drop in EU yields would likely pull US yields lower, and that's exactly what happened this morning.

Conclusion: the assessment was made.  Bond markets were faced with ample positive economic data, yet were forced to follow European bond markets in a counterintuitive direction.  To perfectly illustrate this phenomenon, right after EU bond markets closed for the day, Treasury yields began to rise and MBS began to fall. 

In other words, prices were propped up by the EU session and are releasing some pressure now.  It remains to be seen how far things will go in the other direction, but it's already made for a negative reprice risk situation for Mortgage Rates.