MBS MID-DAY: Bond Markets Staying Strong After Mixed Morning Data

The blue line is stocks; yellow is 10yr yields. When we see a chart like this on the last 2.5 days of the month--ESPECIALLY when the recent norm has been for stock prices and bond yields to travel together--the tacit suggestion is that bond markets are benefiting from 'month-end' buying.

Money managers and other account types have certain trades that either must be made or that would simply be advantageous/prudent to make by the end of the month.  This can arise from the need to match a certain published index or simply to "hit numbers" for the month.

One thing we know about April is that there are still plenty of "shorts" in the Treasury market.  That's just a fancy way of saying there are traders who have open positions that benefit from rates moving higher.  It's a common misconception to think about "profit-taking" as a move lower in price after a rally (or a move higher in rate), but in the case of short positions, profits are booked by BUYING. 

In other words, if I'm betting rates will go higher, I sell today and buy-back when rates move up to close my position and make a profit.  We can't know exactly when the short bets were originated, but it's a good bet that recent short-term traders shorted the market heavily mid-month when rates bottomed out.  Regardless of the forced buying that can take place at month end, those short positions may also be interested in covering this week, ahead of NFP, and month end, meaning extra positivity today.

That could go some way toward explaining why ADP and Chicago PMI didn't do much to hurt us and why bonds continue performing well despite a reversal higher in stocks.