MBS RECAP: Bond Markets Back to Defense Ahead of NFP

The last two days were nice while they lasted, but today's trading levels are right back in line with most of last week.  In other words, bonds sold off today.  The weakness hit markets like a ton of bricks right at 5am.  Draw your own conclusions, but this is when Europe's CPI reading came out in line with expectations.  The last 3 readings of EU CPI have also been in line with forecasts or better, and each day has seen a significant sell-off.

The implication is that markets are doing some mental math on the necessity for ongoing QE and tacitly determining that stable inflation in the Eurozone means that QE could be ended early.  It's actually quite remarkable how well 2015's bounce coincides with improvements in CPI.

All of the above was good enough for 10yr yields to sell-off up into the 2.4's before domestic data even flashed.  Once ADP employment came in better than expected, the selling continued.

Greek PM Tsipras spoke just before 10:30am and basically said the whole EU bailout effort of Greece stunk!  It's blackmail!  And he expects his people to vote against it in the referendum coming up this weekend.  He claimed that a "no" vote wouldn't mean that Greece leaves the Eurozone.  He showed his bargaining manual in saying a "no" vote was a necessary step in order to get a better agreement. 

While that last point essentially sums up Greece's entire negotiation strategy, it didn't make markets think an agreement was any more likely.  This was helpful for bonds, and it was here that the losses stopped for the day.  There wasn't much of a bounce back, but  it was enough for trading levels to hold steady in Treasuries through the close.  MBS underperformed, however, with Fannie 3.5s heading out at the weakest levels of the day.