MBS Live Recap: Bonds Bounce Back to Finish at Best Levels

Today was the sort of day you could ask 10 market pundits about and get 10 different answers as to the source of inspiration.  From a prevalence standpoint, much of the credit for the rally was given to European political headlines, but I suspect this has most to do with the absence of big-ticket domestic news.  It's true that French bond yields widened aggressively versus European benchmarks, but those moves weren't readily connected to equal or opposite moves in the US bond market.

8:20am saw the biggest surge in volume as well as a shift in the overnight momentum, and I think that tells us something about underlying motivation.  8:20am is the CME pit open.  Not only do Treasuries options traders begin their day at 8:20am, but every trader that keeps a desk at the CME (it's not just the guys on TV behind Santelli).  Beyond that, even traders outside the CME can get cues from options trades.  The bottom line here is that 8:20am is one of several possible times of day to see increased tradeflows without regard for data or headlines.  Traders just have trades to make and other traders may make trades in response to those trades.  Tradeflows!

Then there's the NFP carryover momentum.  Recall that NFP was positive at first, and then bonds sold off on Friday afternoon.  Today's rally could be seen as a simple continuation of the initial post-NFP momentum, with Friday PM selling being a temporary run to the sidelines ahead of the potentially politically-charged weekend.  This assessment is harder to contradict than the European explanation, but it's just as hard to prove.

There are several additional rabbit holes to explore (including stock market weakness and ECB comments), but here too, everything is conjecture until we see some more volume (today was relatively light) and more correlation between headlines and market movements.  Most of today's correlation was with various closing/opening times.  Thus, it doesn't make much sense to assign blame to headlines/events that weren't coinciding with the activity.