MBS Live Recap: Once More With (Slightly Less) Feeling

Bonds rallied today, eventually.  Most of the session was fairly flat with the afternoon bringing most of the rally thanks to another sell-off in stocks.  This time, the stock losses were more measured, but only relative to days like yesterday.  On a normal week, today's stock losses would have been huge.  The fact that bonds only gained as much as the did is telling, and probably grounds for concern about the sustainability of the move.

As much as it pains me to say it, bonds have their widest eye on stocks at the moment.  The uncertainty of the day's stock momentum prevented any bond trading aspirations during the morning hours, despite the fact that weaker core inflation justified a rally.  Think about it this way: bonds already got to rally quite a bit yesterday, well before the inflation data came out.  There's really no telling where yields would have ended up today if not for the 2-day move in stocks. 

Bottom line: we'll need to see what the 3-day move in stocks looks like tomorrow.  If we have anything going for us, it's the fact that bonds seem to have obviously encountered resistance at the 3.13% pivot point in 10yr yields, and a majority of traders are probably gearing up for a bounce if stocks don't sell-off again tomorrow.  That creates (maybe) lopsided short positions in the short term.  If buyers make a strong enough showing to cross the right levels, there's a chance we'll see a short squeeze.