MBS Live Recap: Bond Rally Steamrolls Naysayers With Help From Europe

2 months ago, today's European Central Bank announcement looked like it would be a big deal insofar as it would be the venue for the ECB's first official comment on the fate of its bond buying program (set to expire in December).  In recent weeks, anxiety over ECB policy has faded for 2 reasons: Draghi and other officials have been offering reassurance, and a combination of geopolitical risk and fiscal policy concerns have moved into the spotlight for US markets.  

Even with the ECB being generally removed from its previous pedestal, the event still proved to be a market mover for US bond markets today.  Not only did the ECB reiterate its bond-friendly messages, but it went a step further in revising inflation forecasts lower.  

ECB President Draghi did very little to downplay the bond-friendly takeaway in markets.  If anything, he added to it by pointing out risks to the inflation outlook as a reason to hold off on specifying a date or a roadmap for winding down bond purchases.  

Draghi went on to say that the program allowed "flexibility" that could be "exploited" so as to minimize ill effects of tapering.  In other words, even when we do  announce a decrease in bond buying, you still shouldn't worry about it.

European bond markets took him at his word and embarked on a strong move toward lower yields.  US bond markets didn't follow in lock-step at first--not a surprising turn of events given the raft of traders who took out short positions yesterday and the day before (i.e. they bet on rates bouncing).  

But it only took a few big trades around 9:57am to send those shorts scrambling.  Covering a short position = buying bonds.  In turn, this pushes yields lower and potentially sets off a stop-loss level for the next short position holder.  The snowball momentum continues until the short-covering has been exhausted, or about 90 minutes by today's standards.  Bond yields rebounded just slightly, but notably continued holding underneath Wednesday's lowest levels.  

10yr yields hit the 3pm close at 2.059 and Fannie 3.0 MBS were more than a quarter of a point higher at 101-15.  Fannie 3.5 MBS were up 6/32nds at 103-28.