MBS Live Day Ahead: The Blessing and Curse of The Geopolitical Risk Cycle

Geopolitical risk is one of the most intuitive market movers for bonds.  Threats of nuclear attacks from North Korea (as well as the rhetorical response from the US) are a classic example of geopolitical risk.  Were there to be an actual nuclear attack, it would surely result in massive stock losses and bond market gains.  The underlying concept is this: anything that creates uncertainty about the future of world's economies--let alone the world itself--motivates investors to move money to safe havens like cash and government bonds.

Although the risks may not be terribly likely to materialize, they have to be accounted for nonetheless.  Through this part of the geopolitical news cycle, the headlines are nothing but a blessing for bond markets, even though the underlying events would be a curse for the real world.

The roles are reversed when and if the geopolitical risk is defused.  Bonds are cursed by a weaker bounce, and the real world is blessed by the absence of nuclear war.  This is what we're seeing this morning as North Korea abruptly declared it won't be attacking Guam and will wait to see what the crazy old USA does next.  If you get a chance to read a news article or two on this topic, some of the English translations are quite entertaining, depending on your sense of humor.  In any event, "foolish yankees" could be a good band name (especially for a Damn Yankees cover band).

Stronger economic data and corporate bond issuance are adding to the overnight selling pressure.  Bonds are essentially beginning their day right in line with the 2.28% technical level that served as support at the beginning of last week.