MBS Live Recap: Early Close Couldn't Come Early Enough

Bond markets closed early today (2pm ET) in observance of tomorrow's Independence Day holiday (and will be fully closed tomorrow).  Fans of low rates would have preferred a full closure today as well.  Although bond markets began the day with a decent rally into modestly positive territory, trading screens turned red after the ISM Manufacturing data (strongest since 2014) and never looked back.

In fact, the reaction to the data was fairly big--bigger than it probably would have been on a non-holiday week.  The half-day today and the full closure tomorrow (both in the heart of summertime) combine to pull more than a few market participants away from the desk--either early or altogether.  The low-liquidity environment means it takes fewer dollars traded in order to move markets.

In other words, if there are 10 bond traders with $10 dollars each and one of them decides to sell it all, that's only 10% of the market.  If there are 5 bond traders with $10 dollars each, that same trader is now 20% of the market.  Granted, it's not just one trader here or there causing the effects of illiquidity, but this reduction to tiny numbers illustrates the principle of a "lower bar" for any given amount of market momentum.  

All explanations aside, the bottom line is that the trend remains unfriendly for rates, and it doesn't look like a garden variety correction any longer.  To be fair, there was no reason to think it would be a garden variety correction, given that it was originally motivated by ECB tapering fears (a big deal in the bigger-picture), but the movement since then confirms those gloomier fears.