MBS Live Recap: Nice Gains More About Europe Than Fed

Bonds surged to significantly stronger levels in the presence of the Fed Minutes today.  Any time we see strong gains on a day with a Fed release, chances are the Fed is behind the move.  Incidentally, that's NOT the case today (spoiler in the headline, I know).

So how did Europe trump the Fed in terms of bond market impact?  

In short, this is all about Italian political drama.  The two anti-Eurozone parties who are forming a coalition government in Italy are waiting for confirmation of their staffing choices from the Italian prime minister (yeah... things work differently over there).  One of the picks had previously referred to the Eurozone as a noose around Italy's neck.  It's not overboard to consider this political regime as potentially pushing Italy away from the Euro.  That's the risk that bond markets have largely benefited from in recent days (unless you're talking about Italy's bond market, which has tanked).

European volatility drove big overnight gains in US Treasuries and that move accounts for most of today's gains.  All this having been said, the Fed Minutes didn't hurt bonds either!  While Fed policy is largely a 'known known,' and while today didn't really change that fact, The Minutes nonetheless came off as moderately bond friendly.  The Fed approached the topic of inflation in such a way that reassured markets about their willingness to maintain an accommodative stance even if inflation moves above 2.0%.  Concern was also expressed for the wide variety of outcomes associated with trade policy changes--most of them negative for growth and inflation (and thus positive for bonds/rates).

By the end of the day, 10yr yields were moving back and forth across the 3.0% barrier.  More importantly, they'd convincingly broken below the 3.055% technical level.  If that can be held tomorrow, it would bode well for near-term momentum with the caveat being that the positive shift is based on something as flighty as European politics.