MBS Live Recap: Bonds Scramble Back to Unchanged, Leaving Outlook Cloudy

Treasuries and MBS have spent the past 2 days trading well inside the range set by last Friday's volatility (big rally following CPI data).  Unfortunately, the central tendency during those 2 days has been toward moderately weaker levels.  This casts some doubt on what looked like a clear signal on Friday, but it's too soon to rule out additional gains based on today's trading.

After all, bonds did manage to make it back to unchanged in many cases.  Fannie 3.5 MBS were perfectly unchanged and 10yr yields ended the day just barely into positive territory.  Things looked more bleak around 9am this morning when bonds had taken a noticeable turn toward weaker levels.  

There were no clear fundamental justifications for the movement at the time (import price data was 20 minutes before the bigger moves in bonds), but the declining volumes and the lack of correlation with stock market movement suggest bond-specific tradeflows.  In other words, some big traders made some big trades just before 9am and these served as inspiration for other traders who'd been waiting for a sign.  The lower volume environment allows such trading to have a bigger effect on prices and yields than it otherwise might. 

In general, the focus for bond traders has been the underperformance of shorter-term yields vs longer-term yields (curve flattening).  One of the simplest conclusions to draw from such movement is that traders increasingly see a rate hike in the short term but not a corresponding uptick in growth or inflation.