MBS MID-DAY: Bonds Battle Back After Getting Hit by Greece Headlines

On an otherwise quiet morning, bond markets had been holding in reasonably strong territory.  MBS and Treasuries began the domestic session at slightly weaker levels, but found support with most of yesterday's gains intact.  There was no significant economic data this morning and no notable headlines until 9:50am.

Then the Greece-related headlines started to hit wires.  The gist was that Greece's creditors are/were close to working out a debt deal.  The timing and composition of the news was odd.  No one was expecting any such announcement today, and the details seemed sketchy, at best.  Still, markets took it seriously at first.  Treasury yields spiked modestly, led by a more sincere spike in German Bund yields.  (Germany has been the biggest safe haven for sovereign debt in Europe and thus stands to lost the most ground if things improve for Greece.)

Shortly thereafter, the true colors of the news began to shine through.  The turning point was this little gem:

RTRS - GREEK GOVT OFFICIAL SAYS PROBLEM OF DIFFERENCES AMONG CREDITORS REMAINS, DEAL WOULD HAVE CLOSED ALREADY IF IMF'S AGREEMENT WAS NOT REQUIRED

This made the whole affair look very much like an attempt to twist the IMF's arm over the upcoming debt payment deadline in early June.  Bonds quickly ceased their selling efforts as soon as that headline hit the wires, and yields have gone no higher since then.  

By 11am, an EU official was on the record saying that  the EU couldn't confirm that a debt deal had been drafted.  It was a somewhat equivocal statement that implied something could actually be in the works.  Markets have traded accordingly with bonds still no weaker than the original sell-off, but not yet returning to the morning's previous range. 

The next hurdle is the 5yr Note Auction at 1pm.  Given the recent fluctuations in the yield curve, it could have more of an impact than normal (it typically doesn't have much, if any impact).