• Treasuries much stronger overnight, following weak Chinese trade data, strong Japanese bond market gains, and decent European bond market gains
• Bond traders who bet on yields moving higher were increasingly forced to cover those bets (by buying bonds)
• The positional snowball rally ran its course by 11am and flattened out into the close

Although there is at least one frustrating caveat to discuss, bond markets were at least able to put some green on the board today.  Actually, the gains were fairly substantial in Treasuries  (MBS only gained about a quarter of a point) with 10yr yields ending the day 7.4bps lower at 1.83.  

The most popular justification for the momentum was the overnight trade data in China.  It showed a much bigger contraction than expected, and bond markets did indeed rally in its wake.  Still, we should probably expect to see Chinese equities markets taking a bigger hit if Chinese economic data is driving a global "risk-off" trade.  To be fair, the Shanghai did take a big hit at first, but actually ended the day in positive territory.

Treasuries (and ultimately MBS) found other reasons to rally.  Overseas bond markets were quite strong overnight--especially Japan.  Stocks helped too with the S&P putting in its first losing day in March.  But there is a big caveat for most of these movements.

March has been a lopsided month in terms of stock market positivity and bond market negativity.  With the ECB announcement coming up on Thursday and a few overnight catalysts, today quickly emerged as a good day for traders to 'square up' trading positions (that's just a fancy way of saying they were closing trading positions).  On a rally day in bonds, short positions (those betting against rallies) feel the most pain.  If a rally brings trading levels far enough, short positions can be forced to cover (by buying bonds).  This, in turn, further improves prices, thus forcing more shorts to cover.  

The short-covering in bonds ran its course by 11am and yields bounced higher along with a recovery in equities markets.  MBS underperformed the Treasury gains for a few reasons.  First of all, MBS simply tend to underperform rallies, period.  Additionally, the 'short-covering' motivation is much larger for Treasuries as that's where bond market speculators are trading.  On a final, more esoteric note, as this week's corporate bond supply is being originated, some of the hedges that were previously taken out (big firms selling Treasuries to lock corporate bond rates before issuance) could be unwound (big firms buying back the Treasuries they'd previously sold short--also a form of short-covering, but not necessarily because of a speculative bet on rates moving higher).