After days like Monday (in which the bond market lost ground at the fastest pace in months due to the Pfizer vaccine news), we can see one of three things: a quick bounce back, a pause for reflection, or additional selling pressure.  European traders made a case for the latter overnight.  This leaves today's session to either confirm an increasingly weak trend or make a case for some semblance of a sideways grind.  The stronger response (i.e. that "quick bounce back") seems to be off the table.  As such, defense is the best defense until further notice.

This isn't to say that rates are doomed to continue to rise and never return to current levels--simply that this trend is currently not your friend, and it hasn't been for months now. 

Things are particularly tense at the moment because the trend is actively challenging the long-term ceiling at .96.  The mere fact that traders have NOT used these levels as a clear BUY signal is plenty of reason for caution.  It's particularly interesting given the rampant spike in covid cases.  

In other words, rising covid case counts are NOT having the same effect on bonds that they did in the summer.

Why?  There are several potential reasons (and several more I probably haven't even considered.

1. The perception that the domestic economy is better able to limp along with rolling regional lockdown requirements
2. Traders are waiting for actual economic fallout to show up in the data
3. The market has a high degree of confidence in a vaccine 
4. Bonds were vastly too bullish in the summer because traders had no idea when the case count spike would level off and what the ultimate economic fallout would be.  Instead, it leveled off fairly quickly, and economic data was generally stronger than expected, sooner than expected.  So now, even though the current case count spike is going to get MUCH worse, traders know it isn't the end of the world.  After all, 10yr Treasuries account for growth and inflation over a 10yr time frame, and a 90% effective vaccine (jury's out, of course, but this is at least a possibility after yesterday's news) would mean that 8 to 9 of those years could be relatively covid-free.  In other words, the summertime yield lows reflected an utterly uncertain future with respect to the duration and severity of covid and its economic impact.  Traders had to price in years and years of that uncertainty, but now we can at least see some light at the end of the tunnel.
5. Either that, or all of the above simply provided an excuse for traders to push yields as high as possible before going on a massive bond-buying binge heading into the darkness of the winter months.

The answer is either 4 or 5--possibly a combination of the two.  Fortunately, MBS are outperforming so much that there are no words to describe it and lender margins are still plenty wide to provide mortgage rates more insulation against a Treasury sell-off than any of us have ever experienced.  Even if we stopped tracking that outperformance/insulation right this moment, we're already on par with the best examples of the past decade, and that's WITHOUT counting the spread blowout seen in March.  If we set the starting line in March, the current stint of insulation/outperformance isn't even playing the same game as past examples, let alone in the same league.