MBS Live Recap: Bonds End Where They Began

The beginning of this holiday-shortened week was fairly exciting.  It was the first major "opening gap" (yields/prices opening a day well into territory that wasn't traded in the previous day) we've seen happen since September 2017.  Then again, opening gaps are more likely to happen on the first day back from a 3.5-day holiday weekend (the last one was after Labor Day weekend, for instance).  Reason being, the domestic holiday gives overseas markets a chance to put spin on the ball before we get up to bat.

Italy was up to the task with rate-friendly drama that made last week's look tame.  Unfortunately for fans of low rates, the Italian political machine began pushing back in the other direction on Wednesday--setting in motion a series of events that culminated in today's trading levels returning to Tuesday's opening levels.

The final piece in the Italian puzzle was the confirmation of a replacement Finance Minister after the first candidate was rejected.  If they hadn't been able to find someone for this position, the country would have to go back to elections, which would likely end up being pitched and perceived as a vote on leaving the EU.  Even if Italy might have trouble actually pulling such a thing off (some experts say it would be much harder than Brexit), the last thing the EU needs is an emboldened Italian government and citizenry clamoring for Ital-exit.  Or is it Ex-Italy? 

Either way, this Italian drama served as some sort of general barometer for risks of the EU unraveling.  Regardless of how likely that might be, avoiding fresh elections is risk-positive for financial markets and thus bad for bonds.  It took a toll on each of the past 3 days and left the jobs report to leave a barely noticeable dent.