MBS Live Recap: Draghi Helps Bonds Hold Range Ahead of Jobs Report

By: Matthew Graham

The ECB released a policy announcement this morning.  They weren't expected to make any significant changes and indeed they made none.  Well, to be fair, they did remove a line about increasing bond purchases if the outlook worsened and there was a very small reaction at first (rates moved higher--mostly in Europe).  But Draghi's press conference--which is really what it's all about when it comes to ECB announcements--took bonds in the other direction.  

Draghi didn't say anything incredibly significant, but 2 comments resulted in noticeable upticks in volume and buying demand:

Comment 1: DRAGHI SAYS DECISION DOESN'T SIGNAL CHANGE IN EXPECTATIONS OR REACTION FUNCTION 

Comment 2: DRAGHI SAYS THERE WASN'T MUCH DISCUSSION ABOUT OTHER POSSIBLE CHANGES

The first comment was meant to address the removal of the bond-buying text as discussed above.  Draghi's point was that the text was from 2016, when the ECB felt like it needed to add extra psychological support and that the change in the text doesn't mean a change in their underlying willingness to do whatever's necessary to achieve their goals.  The second comment essentially reiterates the status quo nature of the policy decision.

The biggest move of the day arrived just as Draghi finished taking questions.  This suggests traders lined up to make certain trades and were simply waiting to make sure Draghi wasn't going to say anything that made those trades ill-advised.  Then, as soon as European bond markets closed, US bond markets weakened steadily through the 3pm CME close.  Thankfully, the weakness left a fair amount of the morning's gains intact.

By the end of the day, bonds had rallied enough and sold off enough to suggest they are as equivocal as possible heading into tomorrow's jobs report.  10yr yields failed to break the important pivot point at 2.85%, but they managed to avoid breaking above the 2.87% level (2.85%-2.87% has been this week's nearest pivot point, and is essentially smack dab between the recent range boundaries at 2.79% and 2.92%.