MBS MID-DAY: Strong Morning Potentially Beginning to Fade Post-European-Session

Staying on this topic of yesterday's weird juxtaposition of analysis from the Fed, today's trading is fairly logical.  The juxtaposition in question involves the Fed's reiteration of their intent to hike in Dec (not a true reiteration as it's simply additional info from the same meeting that gave us the "hike in Dec" message) with their new, tremendously interesting discussion about rates potentially getting stuck near zero around the world for an extended period of time.

Yeah, they said that, and there doesn't seem to be much conversation on the topic today.  But Financial markets are trading it!

The totally logical way to trade short term rate hike expectations and long term "stuck near zero" potential is to buy long term bonds and sell short term bonds.  With that in mind, 2yr yields are slightly higher on the day and 30yr yields are significantly lower.  This is also known as "flattening" of the yield curve (because a plot of maturities on the x axis and yield on the y axis would be flatter).  Flattening and steepening trades are just as much of a bet on bond markets as the more basic "buy vs sell."  It's good to keep in mind as we tend to discuss market events as either good or bad for bonds/rates in general.  Sometimes traders will be more focused on what's good for one type of bond versus another.

On a related note, sometimes trading levels are determined LESS by where a trader sees bonds moving and MORE about the positions they currently hold (and the associated implications that go beyond market movement).  Sometimes we talk about this as "positional" trading considerations.  For instance, traders have been mostly short on Treasuries (i.e. betting that rates move higher).  Combine that positional reality with the fact that Thanksgiving week is coming up--a time that traders usually move to the sidelines--and a small rate rally is a natural result.  Reason being, if you're short, you move to the sidelines by closing short positions, and you close short positions by buying the bonds you sold short. 

On a less esoteric note, Europe continues sending positive vibes to domestic bond markets.  German Bunds have rallied consistently since following Treasury yields higher after this month's NFP data, and are now back below .50.  It's been fairly common to see domestic markets lose steam in the afternoon after Europe helps push us to lower yields in the morning.  It looks like that game may be afoot even as we speak.