Bonds were weaker overnight, weaker during the AM hours, and just for good measure, weaker again in the afternoon. When the dust cleared, 10yr yields had risen nearly 9bps and Fannie 3.0 MBS were down more than a quarter point (Fannie 2.5 coupons more than half a point). Surely, there must be something big and obvious to drive such a move! Was it some sort of trade war tweet, a big central bank speech, or an important piece of econ data?
The 3 distinct stages to the selling would be our first clue that we were NOT dealing with one of those huge, singular, convenient, logical market movers. If we could only blame one thing for today's pain, it would have to be "technicals." That's saying something (for me, anyway) because I greatly hesitate to pin big market moves on technicals.
This one is actually pretty logical. For several weeks, both pundits and traders were sure they'd soon see a bond market bounce because yields had so quickly broken below 1.90% in early August. Then they hit 1.595% the following week and SURELY, surely that must be the end of the crazy rally. After 1.475% flashed the following week, you'd think lessons would be learned, but no. Trump's decision to "order" US companies to bring operations back home fully erased a week and a half of potentially corrective momentum and reignited the bond market pain trade.
That was on August 23rd, and it wasn't until September 3rd that yields finally put in their most recent bottom. By that point, trader sentiment surveys and reportable positions were in more and more agreement about yields continuing to fall. That's JUST what the market needed for yields to begin rising again! Long story short, bonds had finally made suckers out of almost everyone who saw how low rates were and bet on them rising. Those investors quickly filled seats on a bandwagon of belief about rates continuing to move lower. This, in turn, provided the market with a nice new population of victims for another contrarian trade.
Sure, all of the above may be a bit too reductive and/or oversimplified, but it speaks to actual market forces that play out time and again. Best case scenario, buyers will wake up and remember why they were buying last week. Worst case, the year's low yields are behind us. All we can do right now is follow the new uptrend in rates, currently in its infancy, but looking rather cranky.