MBS Live Recap: Bonds Adrift, No Land in Sight

Bond markets are officially looking for inspiration, motivation, or even just something to pass the time.  Today's events didn't seem to do the trick as trading levels drifted aimlessly throughout domestic hours.

That's not to say bonds didn't move, however.  The overnight session saw 10yr yields rise to the 2.36% pivot point to start the day.  From there, they never came close to breaking outside a narrow 2bp range until after the 3pm CME close.  This means all of the morning's economic data and the passage of the House tax bill (just the House, not the Senate) were effectively meaningless as far as bond markets were concerned.

When we see surges in volatility at (and after) 3pm ET, it's a sign that trading conditions are light and that day traders had been making bets on things moving in the opposite direction from the post-3pm move.  In this case, that means day traders were piling into a "flattening" trade (betting on 10yr yields and 2yr yields moving closer together).  When they exited that trade, it either meant 10s would have to rise or 2s would have to fall.  

10yr yields edged up to 2.375% by the end of trading and Fannie 3.5 MBS were back in line with the morning lows (down 5/32nds at 102-20).