MBS RECAP: Pain Continues For Bond Markets; Reasons Remain Frustrating

Who can forget this classic quip when asked why rates are higher: "more sellers than buyers?"  OK, so maybe that's not so classic, depending on your background, but the point is that it's not too far from the thesis for the current turmoil in bond markets.  Granted, if we take the time to devote quite a few more words to the topic, we can talk about how the long term prospects for low US rates have been perpetually dependent on the trajectory of European rates remaining  on it's 2014 path, but who has time for all that?  Do your business partners and clients raise an eyebrow if you tell them rates are moving higher because of Europe?  Is it worth it to explain to them why you're right?

No, not at all.  It's far easier to say "more sellers than buyers."  It has the added benefit of being true.  Just forget the fact that the sellers have emerged almost exclusively because markets are sensing a long term bottom in European bond yields and you're essentially there. 

Of course there are other factors, but they're even more esoteric and frustrating to explain to clients and colleagues (these include tradeflows, corporate bond issuance, and Treasury auction positioning, among other things).  Probably the toughest among those is the notion of tradeflow momentum.  This has come up several times today, and in several ways.  The easiest way to think about it is to consider that many traders either make conscious decisions or are forced into a particular trade when the price of the thing they're about to trade hits a certain level.  You might here those funny old actors talking about their "buy stops or sell stops" on the trading commercials  on CNBC. 

In a client note today, CRT Capital's David Ader said of the Treasury market "when you have the type day versus day volatility this market has been experiencing it's not about sustainable logic and momentum, but panic and positions."

That's basically it.  Rates (or prices of bonds) hit a certain level and it prompts automatic buying or selling.  Let's say it's selling, because there's been a lot of that recently.  Selling lowers the price and creates new triggers for the next traders in line.  They either decide (panic) or are forced (positions) to capitulate to the momentum.  Usually there's enough 'depth' in the market to absorb a good amount of movement, but in the current environment, there is less liquidity.  This puts those trigger levels closer together for multiple traders and thus makes for particularly violent snowball movement. 

On a specific note, bonds were actually in stronger territory day-over-day, but hit new 2015 high yields overnight.  Additionally, mortgage rates ended the day higher due to late weakness not being priced in sufficiently yesterday and early weakness setting a low bar for reprices today.  Looked at another way, today's closing levels were downright awful compared to any other close than yesterday.  We would have liked to have seen a lot more bounce back to consider today a 'win.'