MBS Live Recap: Bumpy Start For Bonds in December

By: Matthew Graham

As the bond market shook off the holiday weekend lethargy and metaphorically (and literally) returned to the office, it was met with an immediate barrage of selling triggers.  Stronger Chinese data and an absence of trade deal escalation pushed stock prices and bond yields higher right out of the gate.  Surprising election results in Germany (winner seen spending more public money = more debt issuance = higher yields) along with stronger econ data in the Eurozone sent German Bunds soaring.  Treasury yields followed.

Weakness was running on pure momentum heading into the domestic hours and it wasn't until a weaker reading in the ISM Manufacturing PMI that bonds finally found their footing.  While the initial reaction was sharp, noticeable, and bond-friendly, it only served to send yields sideways for the rest of the day.  1.82% proved to be a hard floor for 10yr yields (more than 5bps higher from Friday) and Fannie 3.0 MBS were at least an eighth of a point weaker at all times.

Tomorrow's data isn't notable, but things will pick up on Wednesday with ADP and ISM Non-Manufacturing.  Volatility could still be a factor tomorrow, however, simply due to "new month" tradeflows (the opposite of "month-end" trading).  In the current case, November's month-end trading looked to have an artificially positive effect on bonds--temporarily bringing yields lower to weather the storm of illiquidity throughout the Thanksgiving holiday.  Perhaps it's now "back to business" in December.  Hopefully not, but that's the risk.