MBS Live Recap: Bonds Lose Ground on Various Headlines

Bond markets lost ground today, with all of the weakness arriving during the overnight session.  The weakness was driven by a general "risk-on" move in financial markets, which tends to favor stocks at the expense of bonds.  In today's case, that was most easily attributable to headlines over the weekend regarding nuclear tension between the US and North Korea.  While far from definitive, the headlines made any drastic actions seem less imminent without characterizing the threat as any less serious.

Once US trading hours were underway, bonds were little-changed at first.  Shortly after the NYSE Open (which can affect bonds due to ETF trading, among other things) bonds began to improve, albeit only moderately.

Comments from NY Fed President Dudley put an end to the positive drift as he suggested another rate hike in 2017 may be more likely than market participants currently estimate, but that expectations for the Fed to begin trimming its balance sheet in September are "not unreasonable."

That's about as clear as the Fed can get in saying they will indeed begin trimming the balance sheet next month, barring unforeseen shocks.  Markets almost universally expect this, but additional confirmation is worth a bit of weakness for bonds.

Fannie 3.5 MBS ended the day only 3/32nds weaker (-0.938) at 103-07 (103.219).  Treasuries had a tougher day, rising 3.32bps in yield to 2.224% (10/32nds or 0.313bps lower in price).