MBS Live Recap: Post-Rally Correction Rains on Bond Market Parade

Today was bittersweet for bond markets, with strong gains in the morning, and an almost complete reversal by the end of the day.  As expected, the early focus was on the CPI/Retail sales data duo at 8:30am.  Both were bond-friendly, and an unsurprising rally ensued.  Actually, to be fair, the rally was perhaps a bit on the aggressive side given the tenor of the data.

In other words, a quick drop to 2.28% in 10yr yields seemed like a strong reaction based on the numbers (+1.7 vs +1.7 core annual CPI and -0.2 vs +0.1 Retail Sales).  This might have been our first clue that the rally was forcing the hands of those holding short positions (bets on rates moving higher), who would cover those bets by buying bonds.  

Shorts aren't the only bets out there.  More than a few bond traders decided to recommit to buying at the beginning of the week as supportive ceilings remained intact (such as 2.42% in 10yr yields).  Those "long positions" (bets on rates moving lower) were profitable enough in many cases to justify the booking of some quick profits as the week drew to a close.  

Europe led the way in this endeavor with German Bunds fully erasing the day's gains by the European close.  US traders followed suit, ultimately parking trading levels near Wednesday afternoon's post-Yellen range--a noncommittal way to end the week and remain nimble for the week ahead.