MBS Week Ahead: Slow Week For Economic Data; High Stakes For Bond Markets

With a few more days between us and last Wednesday's epic bond market snowball, bigger media outlets have begun pondering said epicness.  That's not necessarily a bad thing as it  will give us a chance to review what we already know.

Tue 10/14: Discussed the set-up and how stocks were doing something "different," as well as bond markets being "tuned in."  HERE.

Wed 10/15: Recapped the stock/bond dynamic and briefly mentioned Europe, currency trading, Ebola, and Fed expectations potentially shifting.  HERE.

Thu 10/16: Commentary title included "Blame Game."  Enough said.  HERE.

Fri 10/17: Discussed the huge uptick in bond traders betting on higher rates as of Tuesday (in data released on Friday) as greasing the skids for the "snowball buying" seen on Wednesday.  Bloomberg covered this well.

In other words, there's not much to ponder here.  Yields had reached levels that, for many, were already too low and constituted a clear selling opportunity.  Traders bet rates would go higher (and in the greatest numbers since the 2013 taper tantrum).  But stocks and Europe weren't done pushing the "risk-off" trade. 

The result was akin to dividing by zero for bond markets, who weren't even remotely prepared for a move under 2.2, let alone 2.0. The short positions were brutally flushed out and bonds resumed paying attention to the state of the stock sell-off. 

When Stocks opened weaker the following day, bonds followed again, but as soon as stocks found their footing (incidentally right in line with the previous day's lows) bonds didn't even wait around before heading back over Wednesday's weakest levels.  Friday was an inconsequential drift into slightly weaker territory.

The pull back now brings 10yr yields close to the outer gates of last week's amusement park.  This is the gap between 2.26 and 2.28  that we discussed on Wednesday morning.  Crossing above wouldn't magically lock us out of any future rally attempts, but it's a significant line in the sand, above which, things would be more like they were before last week.

This week's trading activity won't be able to take many cues from the economic calendar as there isn't much by way of significant data.  But again, that didn't matter last week either.  There was, and still is a much better source of inspiration.