MBS Live Recap: Have You Heard The One About Brexit and Bond Market Volatility?

First things first: all of the volatility we're about to discuss has been occurring inside a fairly narrow range in the slightly bigger picture.  Moreover, much of that narrow range exists inside an even bigger version of a 'narrowing' range (i.e. the "consolidation pattern" that's existed for several months.  

With all that out of the way... BREXIT!  Yes, it's a market mover even though we're talking about politics on the other side of the world.  And no, it doesn't really make much sense, but I will give a brief 10 cent tour.

Some politicians in The UK thought life would be better if the country left the EU.  Voters agreed, albeit by a razor thin margin, and probably without ever being able to understand the economic ramifications of their vote.  Nonetheless, the will of the people is the will of the people, so the Brexit process continued apace for the past 3 years.

March brought the first deadline which was then extended to October 31st, 2019.  It looked like there wouldn't be a viable deal, but markets figured the whole thing wouldn't go down without a fight, so we didn't see much of a freak-out.  Sure enough, 2 weeks ago British and Norther Irish PMs agreed on a conceptual deal.  That paved the way for a more serious version of the deal that the EU agreed to last week, but British parliament still had to sign off.  They didn't sign off this past Saturday because there wasn't enough meat on the table.  British government delivered more meat since then and Parliament voted on a conceptual deal today (basically a vote to say  they were willing to pass a deal as long as the details made sense).  They then refused to commit themselves to evaluating those details in only 2 days time.

Deep breath!

By refusing to render final approval by Thursday, Parliament is probably unable to get something on the EU's desk in enough time to avoid going past the October 31st deadline the EU had set for Brexit.  As such, an extension is likely and we're just waiting to find out how long it will be and if there are any interesting terms.  

The bottom line is that a DEAL Brexit (as opposed to a "no deal Brexit") remains a definite possibility.  That's the greater of two evils for the bond market and a big reason that rates are well off their recent lows.  The back and forth today (and in recent days) regarding these prospects have been almost perfectly aligned with bond market volatility.  The end.

Seriously, that's about the size of it, but I will offer this caveat: I am but a humble unfrozen caveman bond market analyst type of guy.  I know nothing of the intricacies of European politics and British parliamentary procedure beyond what can be gleaned from quick minutes of furious googling when trader friends mention Brexit as a market mover.  I might be missing something here and, if so, please feel free to reach out.  That said, I think we're on the right track.  Either way, this is NOT the be all, end all of big picture market movers.  It is something that is worth volatility inside a range or the augmentation of a trend that exists for other reasons.  Brexit headlines can continue causing volatility inside a range (or perhaps even threatening to break us out of a range), but they may be counteracted by other relevant market movers.  These include, but are not limited to, Thursday's slate of economic data, impeachment developments, auction cycle considerations, technical trading motivations, stock market reaction to earnings, and likely 3 or 4 things I haven't yet considered.

Today, however, things worked in our favor as British parliament wasn't willing to slam the deal through without saving sufficient time for debate.