MBS RECAP: Bonds Continue Back-Tracking Before Brexit Vote

• Treasuries and MBS spent most of morning in positive territory
• Weakness kicked in during/after Yellen testimony
• Markets were waiting for encore from last week's "bond-friendly Yellen"
• Instead, she was balanced, thus no reason for bonds to hang around in the green

While stocks, European bonds, Sterling (Brexit panic metric), and other sectors of financial markets were relatively unchanged during US trading hours, domestic bond markets were inclined to continue their weaker trend.  This wasn't immediately apparent as bonds briefly corrected (i.e. stayed in slightly positive territory) at the start of the domestic session.  Traders were also prepared for an encore performance from the new, more bond-friendly version of Janet Yellen seen after last week's FOMC Announcement.  

Indeed, it wouldn't have made much sense for yields to keep pressing toward higher levels if Yellen had repeated her fairly gloomy assessment about low rates being the new normal.  But this time around, Yellen wasn't leaning in either direction.

In the absence of Fed dovishness, bonds were free to follow their hearts toward higher yields ahead of the 5yr Treasury auction.  The auction itself was quite poor, which merely served to keep the trend of weakness steady into the 3pm close.  The damage was minimal, with 10yr yields up roughly 2bps on the day and MBS down 2 ticks.  Several lenders repriced for the worse due to the gap between afternoon lows and the stronger morning levels.