The day started out well for Treasuries and MBS for a variety of reasons. European bond markets have been the most reliable motivation for overnight movement in Treasuries and last night was no exception. This time around German Bund yields (a good benchmark for overall "EU bond markets") pushed into new all-time lows.
The correlation with Treasuries was stark. 10yr yields saw their highest levels of the night just seconds before EU bond markets opened. Yields began moving lower right at the open and Treasuries followed immediately. Both EU and US trading leveled off by 5am, and then it was Treasuries' turn to lead.
A glut of month-end buying came in just after 8:30am, and this in turn started a snowball of bond buying that further extended the gains. The early morning positivity helped MBS get off to a good start and Fannie 3.5s ultimately made it as high as 102-18 (6 ticks up vs yesterday).
Bond markets turned a corner tentatively into the 9am hour, and losses accelerated after a much stronger than expected Consumer Confidence report. We also can't rule out some hesitation ahead of the 1pm 5yr Note auction. The pull-back just recently brought MBS back to unchanged levels, introducing some negative reprice risk.
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