This morning's bond market weakness is highly deceptive unless you take a closer look at when the various movements occurred and match the movements and volume surges up with headlines and economic releases. Or you could just read the following...
It's pretty simple really, and we already discussed the effects of Mario Draghi's press conference earlier today, but to refresh and recap, bond markets were already trending weaker in conjunction with that event. In fact, 10yr yields reached 1.93 BEFORE any of the economic data came out and the mini-surges in volume lined up well with various Draghi wires.
That being said, there's no question that the large drop in Jobless Claims contributed to some incremental weakness. Incidentally, some might consider this round of claims to be a relative non-event, merely in-line with the trending improvement. While that's generally true, it's certainly an outlier as far as "improvements within a trend" are concerned. And considering that CPI was fairly uneventful and Housing Starts is traditionally overlooked (not to mention the fact that it was weaker than-expected, which should be a bond market positive), we can pretty much rule those out.
The other thing to consider is that the market could simply be using these headlines and events to "do what it was predisposed to do in the first place." In other words, the path of least resistance is potentially "up" in 10yr yields after two recent bounces at the lower end of their range. If the data and newswires are in agreement, they're ideal opportunities to continue along that path. And 1.94-ish is an ideal place to pause for reflection as seen in the next chart.
Here's a closer look at the various volume and yield spikes this morning:
and from MBS Live, a 2-day chart of 10's and Fannie 3.5's
In the grand scheme of things, current MBS weakness is, in fact, on the edge of it's recent trend channel. If prices fall below the lower line for more than a session or two, or by more than just a few ticks, it presents a serious argument for locking, something that MBS originators effectively did en masse yesterday as they bombarded the market with freshly minted TBA's. Today is off to another very healthy start in terms of originations. This is very logical behavior given recent highs combined with 2 days of slight losses (now a potential third day). We'd keep an eye on the trendline seen below, as well as the 1.94 pivot in 10's, expecting at least 1.98 if it breaks and is confirmed.