MBS Live Recap: Bonds on Fire (In a Good Way)

Bonds hit their best levels in nearly a year today, depending on the security in question.  MBS are lagging behind Treasuries for reasons discussed in the Day Ahead post (which you should save and refer to if you've been curious about MBS vs Treasury performance).

The face-melting rally wasn't destined to happen based on the overnight or early morning trading.  In fact, bonds were slightly weaker in the morning hours and didn't read much into stock losses between 9:30 and 9:55am.  Then the ISM report happened.

ISM Manufacturing is one of only a few top tier economic reports in terms of market movement potential and consistency.  Granted, it's no NFP--nothing is--but it's as close as any other report gets.  It completely tanked today, with the worst month-over-month loss since 2008.  That was the bond market's cue to keep the good times rolling.

Yields immediately turned positive, breaking the 2.62% technical floor in the process.  Rapid gains continued until yields hit 2.57%.  After hours of sideways movement, another mini-rally in the late afternoon was good for another few bps of improvement.  By 2pm, 10yr yields were 2.555%.  Fannie 4.0 MBS were nearly 3/8ths of a point higher.

Tomorrow brings the much-anticipated NFP data at 8:30am ET.  Bonds are at more and more risk of a big bounce back with each new day of gains, so it makes sense to have a defensive gameplan in place in the event things start going south.