MBS RECAP: Bonds Take Rain Check on Greece Reaction

It's not immediately apparent when looking at 10yr yields being roughly 5.5bps higher this afternoon, but bond markets largely deferred their reaction to the situation in Greece until we get more information.  Specifically, we need to see whether or not the agreement reached this weekend will be ratified by the Greek and German parliaments.  The deadline for that is Wednesday, so we won't be waiting too long.

The uncertainty over what exactly had been agreed to this weekend was reflected in the day's bond market trading.  Early in the day when it looked like a deal had been struck, bond markets were understandably weaker.  After all, Treasuries and German Bunds benefit from Greek drama.  As the day progressed and the equivocal implications of the weekend's EU meeting became evident, bonds moved back in the other direction.

The bounce back was pronounced in Europe, with German Bunds actually returning to positive territory on the day.  US Treasuries came close, but never quite made it.  Treasuries, specifically, were held back by the big corporate bond issuance from CVS.  Corporate issuance hurts on 2 fronts; both by creating more supply in bond markets and also because the firms handling the books on the big bond offering can sell Treasuries in order to 'lock the rate.' 

MBS did a much better job of holding on to the day's gains, but couldn't help drifting slightly weaker  in the afternoon.  Ultimately, Treasuries made it almost all the way back to the day's weakest levels, but MBS held on to more than half their gains.

Bottom line, today's weakness is NOT Greece-related.  If a real Greek deal rocks bond markets, the sell-off would be much bigger.