MBS MID-DAY: Disregarding Data to Battle Back From Morning Losses

For the 4th consecutive day, bond market trading was exceptionally calm overnight with Treasury yields continuing to hold the same recent range.  The first and only significant data of the day was Jobless Claims.  It came in at the lowest levels since 1973!

One would think this would be bad for bond markets.  After all, not only was it a 42 year low, but it also beat the forecast by 25k.  Yet bonds improved slightly in the immediate wake of the data.  We can only surmise that there are either bigger fish for traders to fry or that the report was taken with a hefty grain of salt considering the same summertime idiosyncrasies making themselves apparent elsewhere in markets.

It wasn't until forex markets made big moves that bonds finally started selling.  On a short term basis, there is a decent amount of correlation between the dollar and Treasuries.  The underlying culprit was an IMF report on Japan's QE efforts and currency valuation. 

The weakness only ran so far, and it stopped at an important place in the range--2.34% in terms of 10yr yields.  This is the pivot/inflection point we needed to see hold as a ceiling today in order to have a shot at breaking the next technical levels (arguably 2.31 and 2.29).  10yr yields are currently trading right around the 2.29 level, so it's a fluid situation at the moment.  If there's to be a significant break lower today, it's as-yet unclear where the motivation will come from, other than a simple "tradeflow snowball."  We'll talk more about that in the recap if it happens.