MBS Morning: Bonds Testing Weakest Levels in 2 Months

The headline is a bit dramatic, but not untrue.  10yr yields were as high as 1.351 yesterday--just a moderate day of weakness away from the 2-month high of 1.385 seen at the start of last week.  Before that, there were two other bounces in similar territory (1.379 and 1.375).  That puts today's heretofore high of 1.382 easily in the same league, and it means we're in the middle of another test of the range ceiling.

There is no obvious catalyst for this morning's selling spree. Analysts/traders will consider the landscape and conjure up scapegoats accordingly. In almost any case, this will include something like "position-squaring" ahead of next week's Fed meeting.  Indeed, in the absence of another more obvious motivation, pre-Fed anxiety is the best guess. 

In addition to pre-Fed anxiety, we can also consider the steady march toward higher yields in Europe--something that the US bond market has done an admirable job of ignoring over the past month.  During that time, German bund yields are up almost twice as much as Treasuries.  The following chart shows the absolute change in 10yr yields since August 18th.