In many respects, the market response to the coronavirus outbreak has been able to take cues from past experience with SARS in 2002/2003.  In many other respects, markets are flying blind due to substantial differences between the past and present.  In addition to the fact that coronavirus has already proven far more contagious and deadly than SARS (which is saying something considering it has been met with a more proactive sense of urgency), China's role on the global stage is also much bigger than it was nearly 20 years ago.  And beyond all that, how could we forget that US/China trade relations are also a defining feature of global economic uncertainty?

All that to say coronavirus matters.  It's definitely been the biggest market mover of the past 3 weeks--especially for Chinese equities and US bond markets.  As luck would have it, mainland China's equities market was closed for the entirety of last week for the new year holiday.  Part of last week's bond market rally in the US owes itself to anticipatory positioning ahead of Shanghai's reopening.  When that happened yesterday, Chinese equities were decidedly sideways.  US Treasuries stopped rallying, but didn't panic immediately.

Today, however, is another day with the percent increase in coronavirus cases declining.

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Today also saw the Shanghai index move noticeably higher, as if to say the massive week-over-week losses seen at yesterday's reopening potentially mark some sort of floor.  Could the floor be revisited?  Certainly!  But if that doesn't happen, and moreover, if Chinese stocks continue to reclaim lost territory, the US bond market isn't likely to take it very well.  

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All of the above should come as no surprise if you've been reading my commentary lately.  Really, the only thing to be truly afraid of with respect to currently low rates is the eventual unwinding of the coronavirus fear trade.  This has been and will continue to be a guaranteed and inevitable source of weakness for bonds.  Don't kid yourself into thinking we won't have at least 10-15 bps of 10yr yield to give back and perhaps as much as 30-35 bps depending on surrounding data and events.

Speaking of surrounding data and events, I actively try to avoid political news until I see other smart people talking about it in an objective way.  That's happening this morning for the first time in a long time around bond market campfires.  The general consensus is that last night's Iowa caucus failed to deliver a clear message about a democratic front-runner, thus improving the odds of a Trump re-election.  At present, markets interpret that as being good for stocks which, in turn, adds some pressure to bonds due to the prevailing risk-on/risk-off trading mentality.

From a technical standpoint, today is a dangerous one for bonds as we're starting out right up against an important ceiling in 10yr yields.  1.60% (or very close to it) has been exactly where bonds have topped out on 3 out of the past 4 trading sessions.  Technicals suggest momentum toward lower yields is running dry and actually building some correction potential toward higher yields.  If we convincingly break above 1.60%, the next technical level is so clearly defined that a visit to 1.67% is all but guaranteed to arrive shortly thereafter.

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 3.0
102-02 : -0-03
10 YR
1.5840 : +0.0640
Pricing as of 2/4/20 9:30AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Tuesday, Feb 04
9:45 ISM-New York index Jan 869.0
10:00 Factory orders mm (%) Dec 1.2 -0.7