MBS RECAP: What Today's Weakness Was and Was Not About

There have been some fairly silly suggestions floating around as to why bond markets have been taking lumps today, and they're risky because they don't really seem silly at first glance.    The two worst offenders here are oil and stocks.  In other words, several big media stories have casually credited these two related markets as being the the reason that rates moved higher today.

Again, this is reasonably alluring because both of these factors have been meaningful in certain ways.  The problem is that they had absolutely no meaningful relationship to bond markets today.

Oil is the easiest explanation to rule out as crude prices declined just over 2 dollars over the past 24 hours will 10yr yields have risen nearly 6 bps.  So yeah... not only is there no case to be made there, but the facts suggest the opposite conclusion.

Moving on to stocks, it's a much closer call as equities did indeed move up with bond yields during today's domestic session.  The problem arises when we look more closely and find that bonds have had a mind of their own both yesterday and today.  10yr yields had already risen more than 4bps before stocks began moving higher for the day.

I couldn't tell you all the reasons that stocks moved higher, but I can tell you with utter certainty that bond markets are moving higher for several other reasons before they're even remotely concerned with equities markets. 

Year-end is all about 'positioning' when it comes to bonds and balance sheets.  The latter is getting into position by selling the former!  This is happening either directly ("hey!  Let's sell some bonds for cash!") or indirectly ("Hey!  Let's offer our own corporate bond for cash!).  In the case of the corporate bond offering, there is an implied short position in Treasuries as part of the hedging processes.  Add to that the fact that market participants may sell other holdings (like Treasuries and MBS) in order to take advantage of the attractively priced corporate bonds being rushed to market before the end of the year (and before the recent rate rally reverses too much more).

From there, all the usual suspects have their say.  These include things like technically-motivated selling based on yields and/or prices crossing certain threshold levels.  There is also positioning going on for the big ticket events in the coming days.  Whatever the case, the net effect is a current trend that is not our friend.  The silver lining is that Treasuries take bigger lumps than MBS at times like this, but those lumps were so big that MBS weren't anywhere close to avoiding weakness today.