MBS MID-DAY: The Bounce Finally Arrives, Making Tomorrow All the More Exciting

Move over Pontiac.  Bond market volatility is driving excitement. 

While that may be one of the worst sentences I've ever written, it has the redeeming quality of being true.  Things are really getting interesting for the long and short term fate of bond market momentum.

For the past two mornings, I've been suggesting that a corrective bounce was approaching, regardless of the economic data.  We didn't get it yesterday, and that made it increasingly likely to happen today or tomorrow.  (Hint: it's happening today).

The German Bund rout went out with a bang in the overnight session with 10yr Bunds skyrocketing to 0.80.  It was barely 2 weeks ago when they were at 0.05!  So yes... Bunds are the most meaningful ingredient in the recent Treasury weakness because they're yelling the loudest.   Last night was no exception as US 10's were dragged all the way up to 2.312.

But at that point, sellers were spent.  We knew it was coming, and that's when it came (just after 5am ET).  Bunds and Treasuries both started recovering from that point on and the recovery kicked into higher gear when US traders fired up screens in the morning.  Treasuries eagerly led the charge back down under 2.20% 10yr yields.  MBS reluctantly followed (as most MBS reactions to Treasury volatility have been reluctant).  Still... we can't complain if we're moving in the right direction.

Of course economic data was ignored, not only because it was Jobless Claims, but also because the true steamroller is the technical correction.  Yes, it is easier to say "of course" in hindsight, but the sentiment is consistent with my "correction" outlook over the past two days. 

The fact that we got the correction today means that tomorrow's NFP is less encumbered.  It can have a more natural effect on trading levels if markets truly care about the data.  That's exciting because if markets move in the opposite direction from that suggested by NFP, they will very likely continue moving in that direction in the coming weeks.  It's one of the few situations where we actually may be getting a glimpse at a crystal ball.