MBS Day Ahead: So is it Greece or Yellen Moving Bond Markets?

The answer to the question posed in the headline is "yes," both Yellen and Greece are moving markets.  Unfortunately for the more traditional thinkers in the audience, US bond markets have unequivocally been taking their big-picture cues from Europe/Greece despite getting strong short-term cues from Yellen--especially yesterday.  So if you're only asking about yesterday, Yellen's lack of bombshells was positive, as evidenced by the fact that the sharpest rally move occurred right when she finished the Q&A.

Bigger picture, not only does Greece and the Eurozone situation dominate domestic bond market momentum cues, but there's not even a close second.  If the door was open for Yellen to move markets yesterday, it's because US bond markets had strayed more quickly than normal from their European pacesetters.  I know, I know...  This is all very Un-American--giving more credit to non-American factors for American market movement, but the following chart doesn't lie.  Not only is the most recent big-picture bounce all about Greece/Europe, but the last one was too.  (Keep in mind, Greek 10's in the following chart are inverted so that they're moving in the same direction as Bunds and Treasuries.  You could also just think of the green line as being PRICE instead of yield.)

I failed in mid October.  I didn't do nearly enough to shout Greece's name from the rooftops as the legitimate market mover it was.  Major news outlets and smart analysts puzzled over the big, crazy Treasury rally on the 15th of October.  In hindsight, however, it was as simple as looking at the break in Greek debt.  Shockingly enough, Greek 10yr's had a big break a day earlier on October 14th before going on to have an even bigger move down (in price) on the 15th.

It would be a similar failure to say that markets no longer care about Greece/Eurozone.  That said, the biggest drama has passed for this week.  Importantly, it didn't drag German Bunds up past recent support levels, which I think was a key ingredient in enabling yesterday's Yellen-based rally.  The other ingredient was simply that US bond markets have been in full "pout mode" since NFP, requiring too much convincing when it comes to not selling off.  Now that they can rule out an accelerated rate hike timeline (as of the moment that Yellen stopped taking questions!), they're free to close the gap a bit with the bigger-picture European momentum cue.  And so they did.

Yellen would be hard-pressed to say anything shockingly new today, and there's no crazy news expected from Europe.  So perhaps the focus will shift a bit toward economic data, auctions, and month-end trading.  Either way, today is important in the sense that it provides an opportunity for Treasuries to confirm yesterday's resilience.  Even if we lost a bit of ground, holding under 2.04 in 10yr yields would be positive.