MBS MID-DAY: Bonds Trading another "Inside Day," This Time with Nagging Weakness

An 'inside day' refers to today's trading range happening completely INSIDE yesterday's trading range.  The resulting lower-highs and higher lows bespeak a decrease in the overall level of conviction.  It's not for nothing that we've had two inside days in a row now.

Part of the reason for that is the fact that Tuesday set a huge range, but it's also true that bond markets are still waiting for Europe to make up its mind as to the next big move.  European bonds have been essentially flat in February.  Treasuries, meanwhile, have begun freaking out on the chance that Europe's recent sideways grind is a prelude to a bigger bounce.

Today's economic data was irrelevant as far as trading reactions were concerned.  For more salient in terms of causality have been Greece vs EU headlines.  Initially, a letter from Greece, formally requesting a loan extension hurt bond markets.  But just after the domestic open, a spokesperson for the German Finance Minister fired back, basically saying the letter did nothing and means nothing.  Germany's message to Greece is clear: play by our rules or you can't have this money.  Germany already said they're willing to discuss slight tweaks to the current agreement, but as yet, the 2 sides are nowhere near the same page.

After that became clear to Greece for the 147th time this morning, one can only imagine the strategy session that led to the next big headline of the morning.  Long story short on that one: Greece is implying it could get some sort of help from China.  While that's not a new concept in this saga, it's the first time we've heard it in a while, and the timing is a bit too coincidental (i.e. Germany says "nein" a day before a Eurogroup decision and Greece says "fine, we'll ask China then!").

The net effect is nagging weakness for bond markets, but still in the context of the "inside day."