MBS Live Recap: Bonds Looking Nervous and Impressionable

By: Matthew Graham

Let's face it.  It makes sense for the average bond trader to be more indecisive than normal right now.  A no-deal Brexit was avoided this week (bad for bonds), but a Brexit deal couldn't make it through British parliament in time to beat the EU's deadline (good for bonds).  Economic data hasn't been too strong (good for bonds), but it hasn't accelerated into weaker territory, for the most part (bad).  There's still no US/China trade deal (good), but progress is apparently being made in that direction (bad).

Away from actual events and data, we could do a similar song and dance with tradings levels and trends.  For instance, yields have been trending higher for 3 weeks (bad), but they have yet to move back up to the mid-September highs (good).  Momentum metrics have been oversold in some regards (good), but that has yet to result in any meaningful bounce back toward stronger levels (bad).

Top all this off with an important Fed announcement next week and the ongoing potential for unexpected headlines surrounding high-volatility market movers like Brexit and trade wars, and you have the makings for an impressionable, defensive, fearful set of attitudes in the bond market.  That's a baseline that's no big deal in the absence of any compelling arguments, but it resulted in weakness today as stocks surged quickly higher in the middle of the day.  European bond market weakness and Trump trade tweets added to the upward pressure on yields heading into the noon hour.