MBS RECAP: Morning Gains Evaporate After European Headline Extravaganza

The day began well for bond markets, led lower in yield by a sharp sell-off in the Euro currency overnight (lowest levels since June 1st).  Other global markets joined in the move to shed risk.  That generally meant "buy bonds, sell stocks," though commodities were the subject of much attention as well.  For instance, copper saw it's 2nd biggest 2-day drop in 4 years and oil continued lower after it's worst day of 2015 yesterday.

The backdrop for bonds remained positive through 11am.  This has increasingly been a pivotal time of day as it's the first in a series of European markets' closing times.  It served the same role today and bonds began giving up ground after that. 

The weakness was gradual and tolerable at first, but selling momentum picked up in the afternoon as Eurozone officials came out of today's EU summit concerning Greece.  There are too many headlines for any sane person to read and digest, but the takeaway seems to be that there is a grand finale, battle royale of an EU Summit set for Sunday that will ostensibly be the final word on Greece's fate within the Eurozone.  It will include all 28 EU leaders as opposed to simply the 19 who are part of the Eurozone.

Comments from Greek and other EU leaders suggest the possibility of a deal coming out of this weekend.  In short, Greece is to submit a new proposal by Thursday so that German Parliament can approve negotiations that take place over the weekend.  German Chancellor Angela Merkel mentioned that it would be a "new, multi-year program." 

That kind of talk is scary for bond markets that had been drawing their strength from Eurozone turmoil.  But the inclination to sell-off was/is tempered by the fact that we never know exactly what we'll see until we see it when it comes to Europe.  This weekend is no different, but the tough talk was enough to drag 10yr yields back up to 2.26 and to return Fannie 3.5s to nearly unchanged levels after being up 3/8ths of a point earlier today.