MBS Live Recap: Data Driven Reversal Delivers on Volatility Expections

Today was fairly straightforward by the time the 10am ISM Manufacturing data came out.  It was significantly weaker than expected (worst since 2009) and resulted in a fast bond rally with high volumes.  We had been expecting this week to bring increased volatility because it contains the month's most action-packed economic calendar during a time frame where we know the Fed is watching the data more closely than normal (because they said so at the last meeting 2 weeks ago).

Before the ISM report, bonds were in weaker territory after overnight developments in Japan--a weak bond auction and, to a lesser extent, an operational change at the world's biggest pension fund that.  The pension fund news is nuanced, but the short version is that it fired a shot across the bow of negative interest rates being viable investments.  While that might seem like an obvious conclusion, there hasn't been a clever way for certain traders to avoid being forced to buy negative-yielding debt for various reasons.  The maneuvering by this pension fund may change that for some investors.

Despite the initial weakness, bonds managed to maintain a semblance of support  with 10yr yields avoiding a break above 1.75%.  The post-ISM rally took them as low as 1.613% in fairly short order, and most of those gains were intact by the close.  Fannie 3.0 MBS underperformed (again... they don't like volatility), ending the day up only 2 ticks (0.06) at 101-19 (101.59).