MBS MID-DAY: Bond Markets Holding Modest Overnight Gains

It has been a remarkably quiet day so far during the domestic session.  This seems more like the rule than the exception of late.  The only instance of volatility (if you can call it that... and people will laugh at you if you do) came during the late overnight session after some reasonably strong data in Germany.  US and German Bund yields rose together, but both changed course before moving into negative territory.  German yields went on to erase most of Friday's weakness.  US bond markets are not quite there yet.

From a technical perspective, the overnight range had a clearly-defined ceiling at 2.085.  As yields began to move back lower into the domestic trading session, traders who sold bonds on Friday afternoon quickly moved to cover those 'shorts' (aka, buying bonds to close a short-selling position).  The weaker reading in New Home Sales (468k vs 550k forecast) helped extend the short-covering rally.  Keep in mind though, that all this is playing out on a micro-scale where our so-called "rally" has only covered 2.6bps in 10yr yields and just over an eighth of a point in Fannie 3.0 MBS.

There have been quite a few headlines regarding the debt ceiling, and not one of them has motivated a detectable trading response.  It's funny actually.  Several of the headlines suggest that shorter-term Treasury debt is improving due to promising developments on the debt ceiling debate.  Yet the yield curve has been FLATTENING!  (That means that shorter term yields are rising compared to longer term yields).  In other words, short term yields have fallen because the entire yield curve is rallying.  In other words, and in a more incredulous tone, the logic cited by the headlines actually does a better job of DISPROVING them.  What a world.