MBS Live Recap: China Must be Buying

I laughed out loud today--something I rarely do when reading typed words--after MBS Live cornerstone Sung Kim quipped "thank God China is buying today!"

This joke works on so many levels.  Much of the week was devoted to chasing a red herring of a story that claimed China was mulling a reduction in its US Treasury portfolio.  Rational people or those who believed the things I was yelling knew the story was mostly bogus, but it went fairly viral nonetheless because it offered an explanation for market movement that was otherwise not easily explained.

Cue this afternoon's bond market rally.  Bonds had just finished a fairly quick sell-off in response to this morning's stronger CPI data.  Apart from technical levels and potential "value buying" among traders who think they've seen enough recent weakness, there really wasn't any great reason for the rally.  That's why the China comment was perfect.  Bonds inexplicably selling-off Tuesday morning?  Blame fake news from China.  Bonds inexplicably rallying on Friday afternoon?  How about China again?

To be clear, bonds didn't rally because of China.  They rallied because there's not much interest in continuing to sell with 10yr yields at 2.6%.  As I noted in some intraday commentary, this friendly bounce is more about identifying supportive ceilings and less about suggesting positive momentum in the other direction.  

10yr yields closed 1.3bps higher at 2.55% after being as high as 2.59+ earlier in the day.  Fannie 3.5 MBS managed to lose less than an eighth of a point after being nearly 3/8ths of a point weaker at today's worst moments.