MBS Morning: Random Volatility Risks As Traders Tune Out

It's a good time to revisit the primer on illiquidity unless the term is 2nd nature for you (here it is). Illiquidity is definitely a factor today as traders have undoubtedly targeted it as a perfect candidate for a 3-5 day weekend due to the absence of any relevant events on today's econ calendar (and limited events next Mon/Tue) combined with the time of year (i.e. last week before school starts, in many cases).

In a nutshell, illiquidity makes it easier for bonds to move, for better or worse. The fewer dollars being traded, the bigger the impact of each dollar. In this way, it only takes a few big trades to send the entire market moving in one direction or another. On data-free days like this, the issue is only compounded by the fact that many traders are simply looking for cues from other traders.  This is most easily visualized by overlaying things like major equities averages with 10yr yields.  We can throw in UK 10yr yields and--to pick something random but often correlated in the short term--crude oil for good measure.

Note the big pop in volume at 9:46am.  This could have one of several underlying motivations. What's important is that there was no single, overt source of inspiration, AND that all 4 markets have moved in almost perfect proportion since the start of the domestic session.  Combine this behavior with the fact that bonds have consolidated in an increasingly narrow range this week, and today has all the trappings of an unofficial 3-day weekend, even if we do manage to see some volatility inside the narrow range.