MBS MID-DAY: Bond Markets Hop on the Global 'Risk-On' Bandwagon

10yr yields are up just more than 7bps to 1.75%.  That's bad in the sense that 1.70 is an inflection point that would have been nice to hold, but still OK in the sense that 1.84 is much more important.  Minutia aside, even the strongest long-term rallies have to have some down days periodically.

Back to minutia...

What's up with this move?  Primarily, it's a factor of overblown reactions to Greek drama in Europe.  News came out yesterday that Greece would be trying to strike a deal with creditors, but it was after the European close.  That left the brunt of the reaction for today's European session, and there was no doubt that it centered on Greece as the country's 3yr debt plunged 300bps.  For context, that would be similar to US 10yr yields dropping 30bps in 2 hours, something we may never see in our lifetimes.

It's not that the entire world hangs on every last piece of news out of Greece.  In fact, that phenomenon is much less of an issue this time around.  The bigger issue is that Greek drama is hitting an incredibly illiquid market for sovereign debt in Europe and the US. 

Strength in Greek debt equates to some obligatory level of weakness in German debt.  In today's case, it was a whopping rise from .31 to .35 in Germany's 10yr Bund.  That might seem like a small change, but in terms of percent-change, it would be like US 10yr yields moving up to 1.86 today as opposed to the 1.75 mentioned above. 

At any rate, the point is that the news imparts momentum, and markets take it a bit farther than they otherwise might because of the illiquid trading environment.  Momentum is its own justification. 

Fortunately, MBS are doing what they're supposed to do and holding their ground quite well against the Treasury weakness.  In terms of the rate sheet implications (8 ticks in Fannie 3.0s equating to .25 in price on rate sheets, and thus roughly 0.033% in rate), MBS are doing twice as well as 10yr Treasuries.