While there may be a good amount of drama and suspense when it comes to watching coronavirus take its toll on the economy, there's no mystery.  This isn't like past recessions where a realization gradually sets in.  We may not know exactly how big the hit will be, but we know it's inevitable, big, and immediate.  

All of the above is fertile soil for the recent behavior in bonds.  March volatility can be forgiven as a byproduct of extremely poor liquidity, big issuance concerns (high supply = lower prices/higher yields), and a brief learning curve for the Fed with respect to how aggressively it needed to buy bonds.  This can be seen in the highlighted section of the following chart.  Bond volatilty was accompanied by capitulation in stocks.  Both have calmed down and made gains as the fiscal and monetary stimulus efforts provided reassurance.

20200422 open5

It's one thing to look at the past few months and make a conclusion with the benefit of hindsight.  It's quite another to think about what's going on presently, where bonds should be going, and what they should pay attention to.  After all, 10yr yields are as sure as they ever get that they'll need to be somewhere well under 1% at some point in the coming months, just before the economic data confirms a shift. They've arrived at that part very early, and given that size and certainty of the recession, why wouldn't they?  But what to do in the meantime?

That's a great question and so far, the answer has been to trade a relatively narrow range and take short term cues from equities.  Said cues aren't immediately apparent in longer term charts, but the risk-on vs risk-off trade is easily seen over shorter time frames.

20200422 open

Tracking correlation between two completely different asset classes will always be an imperfect science.  The level of connection in the past week is quite strong, but the previous chart offers plenty of evidence about other possibilities.  It also suggests that correlation is harder to find over longer time frames.  Indeed, that's the whole point of this chart from last week:

20200416 Open3

You will also get a good amount of misinformation and misdirection when it comes to correlated markets, depending on the financial news you happen to follow.  Even the best media outlets adhere to the same equation: [simplicity of market] x [volatility] = [news coverage].  In other words, the more mainstream any given market sector is, the more news coverage there will be as volatility increases in that market.  Either side of that equation can do the heavy lifting.  Stocks are about as mainstream as it gets, which is why media outlets don't need to see much volatility to talk about them all day.  Credit derivatives are not very mainstream, but they got a lot of air time when they were outed as a key player in the financial crisis.

Then there's oil.  It's the "stock market" of commodities.  It's also in the throes of unprecedented volatility.  But is it driving the market?  I could make a case for or against that (mostly against).  Instead, I'll just add it to the first two charts and let you draw your own conclusions.

20200422 open3

20200422 open4

At the very best, if oil deserves credit, it's only as another symptom of the same disease.  Naturally, a slowing economy burns less fuel. A booming economy burns more.  The same sort of broad generalization underlies the classic understanding of the risk-on/off trade (i.e. strong economy = stocks and bond yields go higher, weak economy = both go lower).  We already know there's more to it than that for stocks and bonds.  Oil is no exception.  For now, it's just an extremely interesting sideshow.  Don't be fooled.


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
103-23 : +0-01
Treasuries
10 YR
0.6020 : +0.0310
Pricing as of 4/22/20 9:33AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Wednesday, Apr 22
7:00 MBA Purchase Index w/e 182.6
7:00 Mortgage Refinance Index w/e 4242.7
9:00 Monthly Home Price yy (%) Feb 5.2