MBS MID-DAY: After Pausing for Consideration, Bond Markets Rally

Bond market resilience last Friday in the face challenging news suggested buyers might be planning an attack for the near future.  It would have been easy to lose faith in such an attack after the first four days of this week.  There was never a resounding defeat, but incessant, slow, steady, demoralizing weakness.  Even so, the initial reasons for the potential attack (FYI, this "attack" business is just a metaphor for bond market participants being sufficiently enticed to step in and buy the recent weakness) never went away.  I laid these out this morning before NFP.

NFP came in weaker than expected at the headline level, but beat expectations if revisions are included.  The initial stock market reaction was positive, but bonds rallied as well.  That may have been our first clue about the "attack" potentially being on.  But bigger players weren't convinced just yet.  Bond markets gave up all their gains and yields eventually crossed above 2.40 in 10yr Treasuries. 

At the same time, Cleveland Fed Pres Loretta Mester was on CNBC saying that the Fed isn't behind the curve on policy tightening--a bond-friendly statement because Mester is considered to be a "hawk" (not in favor of easy monetary policy).  When combined with the technical target of 2.40 on the screens, This was finally the signal that the bigger buyers were waiting for.  They jumped and turned the tide, at least for now.

Europe is a constant consideration, and also gets credit for helping this morning's rally (and for fueling some of the earlier pull-back as well).  The afternoon is somewhat uncertain with Europe now closed for the day and with US Bond markets hitting their best levels right at the end of European bond market trading.  The implied question: will their absence tip the scales back in favor of sellers this afternoon?  So far so good.

T