MBS Live Recap: Best Day of 2018 For Bonds, But at a Cost

It took 3 consecutive days of pushing into the weakest levels in more than 3 years for bond markets to figure out how to rally by more than a token amount.  10yr yields were 3.5bps lower by the time the 3pm close hit and Fannie 3.5 MBS were 6/32nds stronger at 101-15 (or .19 stronger at 101.47).

When we get rallies of this size in the midst of sell-offs such as the one that's been in force so far in 2018, we can't really read too much into them on day 1.  We should expect periodic corrections in the midst of such negative trends and view further rally potential with a skeptical eye.  That's not to say it can't or won't happen--simply that it's not the safe way to play the game we find ourselves in.

As for specifics, one refreshing feature of today's rally was a fairly linear connection between fundamental data and the bond market movement.  Specifically, the Bank of Japan (BOJ) kept its policy rate unchanged and BOJ President Kuroda pushed back on speculation that ramped up last week suggesting the bank might be moving toward tightening policy soon.  That helped bonds improve overnight and kept things generally positive in the morning.

The afternoon brought a very strong 2yr Treasury auction.  That's a blessing and a curse because high demand for 2s can also suggest lower demand for longer-term bonds like 10yr Treasuries (which correlate more directly with MBS, of course).  Indeed there was some pressure on 10s and MBS following the auction, but they found their footing without breaking meaningfully into yesterday's range.  That technical bounce just before 2pm was probably the most promising market movement of the day for us.  At the very least, it lets us know to keep an eye on 2.634% as an overhead ceiling/lock-trigger.