MBS MID-DAY: In Hindsight, Morning's Big Sell-Off is Simple

In hindsight, this has turned out to be a simple morning for bond markets.  That wasn't the case earlier when we could only guess at the likely culprits behind a pervasive--even counterintuitive--push toward weaker levels.  Then again, maybe that should have been the first clue.

Pervasive, counterintuitive moves are a hallmark of the sort of tradeflow-driven momentum seen near the end and beginning of any given month.  In fact, we've been talking about "new month" tradeflows as being a consideration as March gets underway, but with all the weakness in February, it was easier to hope or expect that the momentum would push back in a friendlier direction.

As it turns out, the opposite has been true so far today.  Traders had an agenda to sell from the outset and were merely waiting for opportunities and safety.  Selling became most safe after the morning's data was out of the way.  The 10am ISM data is one of the biggest reports of the month apart from NFP.  If it had been significantly weaker-than-expected, it would be hard to justify bond market selling on any grounds.  But it came in just 0.1 under the consensus.  Inclined sellers verdict: "close enough!"

Selling was exacerbated by an asset allocation trade (selling bonds to buy stocks).  Additionally, the corporate debt issuance cycle continues doing damage as there are already a few big deals to kick off the month.  Corporate issuance hurts MBS/Treasuries not only by providing competition for bond market dollars, but also because Treasuries are often sold as a part of the issuing firm's rate lock process.

The quick push to weaker levels leaves 10yr yields right at the upper edge of a very important technical zone from 2.04-2.075.  MBS have fared better by comparison.  Fannie 3.0 prices are only down 10 ticks on the day and are currently still inside Friday's range.  Treasuries are nowhere close.