There is some interesting stuff going on with global bond markets.  Even as COVID ravages Europe, benchmark yields (German 10yr) are soaring relative to the recent lows.  In fact, in only a few days they've surged back up to February's plateau.  To put that in perspective, if US 10yr yields did the same thing, they'd be over 1.60% instead of half that.

20200317 open

There's no special rule that says sovereign bond yields have to follow each other, but we typically see more correlation than this between Europe and the US.  So why aren't we?

At the most basic level, we can always forgive extra volatility in securities that have reached more extreme levels.  In other words, 10yr German yields are merely "up" to -0.41%.  Meanwhile, US 10yr yields have never been below +0.32%.  This isn't really the heart of the issue though.

By far the bigger motivation for the EU bond weakness is the twofold phenomenon of Europe's fiscal response to COVID and an absence of the same level of central bank aggression as seen in the US.  This is basic supply and demand.  Government spending (i.e. fiscal response) on COVID creates more sovereign debt.  Higher debt supply = lower prices and higher yields.  And the higher debt supply issue really hit home for European markets this week as German finance ministers say they're willing to break from their longstanding policy of a balanced budget in order to fight COVID.

But there's a fiscal response in the US as well.  We'll certainly be spending government money to fight this battle on multiple fronts.  So why aren't we feeling the same pinch in bond yields?  There are 700 billion reasons for that (the number of dollars in Sunday night's emergency Fed QE announcement).  In other words, any of the new debt being created in the US is already more than spoken for by the Fed.  Whether Europe is willing to be nearly as aggressive remains to be seen.  

To reiterate, the Fed has really surprised the Street with how willing it has been to come out with guns blazing to soften to COVID blow.  It's also been a surprise to see how quickly they've done so.  This is the biggest and fastest response to a looming crisis from a central bank that we've ever seen.  The Fed is employing all of its lessons from the past and seeing what happens if it hits an impending crisis with haymakers in round one.

As far what's driving mortgage rates, I just wanted to add yet another disclaimer: they're more disconnected from MBS and lenders are more disconnected from one another than they've EVER been (because this has not only been the fastest that refi apps have ever surged, but it's also happening amid a time of significant disruption to lenders' operational staffs).  Rates are primarily dictated by lender capacity at the moment.  MBS prices allow for most lenders to offer lower rates, but other factors can prevent it (capacity constraints being chief among them).  Beyond that, margin requirements, funding line availability, servicing valuations, and the cost of hedging amid insane volatility are all contributing as well.  Point being: don't go into any given day with an expectation of where rates should be based on how MBS are trading.  It may work out it may not.  We will eventually get back to a more logical level of connection, but that's going to take days or weeks.


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
UMBS 2.5
102-05 : -0-02
Treasuries
10 YR
0.8030 : +0.0750
Pricing as of 3/17/20 9:55AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Tuesday, Mar 17
8:30 Retail Sales (%)* Feb 0.2 0.3
9:15 Capacity Utilization (%) Feb 77.1 76.8
9:15 Industrial Production (%) Feb 0.4 -0.3
11:00 NAHB housing market indx Mar 73 74