Today was destined to be a lower-volume session simply because it's the Monday after Good Friday. That means many US market participants are still out of the office and the entirety of European markets is closed for Easter (observed as a Monday holiday in the EU).
Low volume doesn't guarantee volatility, but it facilitates it. Think about any group of buyers and sellers where supply and demand set the price. Let's say we all buy and sell oranges. If there are 50 of us with 50 oranges each, we'll have a pretty good idea of what the going rate should be for an orange. Now, if there are 3 of us with 3 oranges each, if 2 of us need to buy and one of us needs to sell, the price of an orange would go up much faster.
In other words, low volume and light liquidity mean that every dollar traded has a bigger vote in determining the price of a given security. That was part of the reason for the afternoon volatility in US bond markets.
If we want to find specific scapegoats, we can looks at both stocks and currency trading. Stocks did more to hurt bonds early in the day, with S&P futures jumping up from flat levels in the 7am hour. Later in the day, it was a bounce in the dollar that coincided with a sharper move toward higher yields in Treasuries.
All of the above spilled over to MBS, with Fannie 3.5s ultimately falling nearly a quarter point from some lenders' rate sheet print times. Several lenders repriced for the worse in the last 2 hours of the day.
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