MBS Live Recap: Bonds Pretend Not to Care About Jackson Hole

Bond markets have been generally rallying since early July.  The apparent inspiration for that rally was the sell-off that preceded it.  That weakness was driven by several comments from European Central Bank (ECB) President Mario Draghi that alluded to a tapering of ECB bond buying after the program expires in December.  Markets know that's a risk, but confirmation is still worth some weakness in bonds.

The rally, then, was the market's way of calling Draghi's bluff.  Actually they didn't have any bluff to call when the rally began because Draghi had already backtracked.  Wax on, wax off.  We priced it in.  We priced it out.  Lo and behold yields made it almost all the way back to the levels seen before that initial late-June sell-off. 

This leaves them in a neutral position to digest any further hints dropped in Jackson Hole today and tomorrow (central bankers are meeting there, and it can sometimes be a venue for "hints").  For today, "neutral position" meant staying well inside the recent 2.16-2.22 range.  With yields ending yesterday closer to the lower end of that range, that meant today saw bonds weaken just slightly.  But in anything other than the smallest of pictures, we've been sideways here for the entire week (technically since last Friday).

Bottom line: 5 days of flatness suggest markets are open to suggestion from the right mix of Draghi/Yellen headlines that we may or may not get by tomorrow afternoon.