Bonds rallied significantly today on a confluence of news.  Disparate events and headlines hit markets at just the right time and in just the right combination to catch bond traders on their heels. 

We began discussing the imbalance of trading positions late last week.  Specifically, logic and technicals suggested a bounce toward higher yields.  In last week's MBS Huddle video, I discussed the opportunity presented by that level of consensus.  Specifically, when there's such widespread apparent agreement that yields will move in a certain direction, big, counterintuitive moves become increasingly possible.

That's not to say that rates will always move opposite the direction that most traders think they'll go.  Rather, I'd say that WHEN rates move in the opposite direction from the prevailing consensus, that move is usually bigger.  Financial media throws around words like "capitulation" or "pain trade" to capture the phenomenon.  Bottom line, the more traders agree on the direction of a move, the bigger the fallout if they end up being wrong.

That's essentially what happened today.  North Korean nuclear threats made the news again over the weekend, and bonds opened a few bps lower in yield (but still inside Friday's range).  Trump tweeted about South Korea and Japan being able to buy sophisticated weaponry and bonds improved further.  This was interesting because the underlying news was already a day old.  The fact that it moved markets spoke to the skittish frame of mind in play as well as the impact of algorithmic trading.  

Once certain levels were breached, they served as triggers for other traders to buy bonds.  That buying, in turn, moved yields down to the trigger levels for other traders, and the cycle repeated (aka "snowball buying").  Along the way, additional factoids helped push everything in the same direction.  These included dovish comments from Fed members, an announcement from Norway's sovereign wealth fund (like a huge trader saying "I'm going to buy more bonds"), anxiety over Hurricane Irma's economic impact, and a general run on bonds among investors who were fleeing from equities markets (i.e. a "flight-to-safety" trade).

By the end of the day, 10yr yields were trading near 2.07 and Fannie 3.5 MBS picked up nearly 3/8ths of a point.