Today's almost perfectly flat (vs last month and expectations) NFP provided a perfect opportunity to see what markets had been afraid of and/or hopeful for.  Bond markets were afraid of a stronger NFP, but not for the reasons we might think. 

Recent conventional wisdom and much of our discussion has focused on Fed rate hike prospects as the central motivation for trade, but today we saw different cards.  Only shorter term bonds are significantly concerned with Fed rate hike prospects.  Case in point, 2yr yields ended weaker on the day and never improved after 11am.  10yr yields, on the other hand, rallied steadily after the initial NFP reaction. 

What's up with that?

The conclusion isn't all too different from my thoughts at the end of July, when I said " the yield curve is increasingly telling us that long term prospects are shaky, and that the short term is most susceptible to Fed policy changes."  This jobs report wasn't any stronger than expected and didn't constitute and improvement from the previous reading.  It certainly wasn't strong enough to argue against some of the other recent signs of shakiness (commodities weakness, China, wage growth, weak spending).

As long as doubts remain over the longer term economic prospects, the longer end of the yield curve can continue to do surprisingly well against the shorter end, as was the case today.

If MBS weren't able to participate in the gains to the same extent, we can also understand that phenomenon in the same way.  While 30yr MBS coupons technically last for 30 years, their average life span is much shorter.  People move, refi, and pay off early for a variety of reasons.  The average life span after accounting for MBS's ability to be paid off early (referred to on the secondary market as the "option-adjusted duration" as it adjusts for the homeowners' or investors' embedded option to call the note due--or pay it off under various circumstances) is almost always well under 10 years at any given time. 

For bond traders, duration is all-important.  And if MBS have a shorter duration than 10yr Treasuries, and if shorter durations are doing a bit worse on a day like today, then MBS usually are as well.  This isn't the only reason that MBS performance can vary vs Treasuries, but it was certainly a factor today, which is easily seen in the fact that--like shorter dated Treasuries--MBS didn't make any gains in the afternoon, despite the fact that longer duration Treasuries moved steadily to the best levels of the day.