MBS Live Day Ahead: Where Would We Be Without Stocks?

It's no secret that the bond market has been sideways for a month and a half by even the strictest definitions, and broadly sideways since first settling down from the initial covid-related volatility in March.  In terms of specific levels, that's .63 - .79 for 10yr yields since August and .50 - .95 going back to March.

No one is under the illusion that rates should be moving consistently higher after last bottoming out in early August.  The market knows we're in for a reasonably long haul of historically low rates due to Covid.  The market also knows that the fight against Covid means increased Treasury issuance (for a variety of reasons apart from stimulus) and persistently more effort to stoke inflationary fires from the Fed.  Both exert some measure of upward pressure on rates to offset the intrinsic downward pressure that logically flows from the pandemic's economic realities.

So are the opposing forces a wash?  Are they at equilibrium and is that why we're seeing the bond market in such a narrow range recently?  Has the Covid economy quite simply removed enough doubt and uncertainty about where bonds should be that there's just not much point in volatility?

If we could only pick one answer, it would be "yes, probably."

But we can entertain other answers for two reasons.  The first is the election.  This one is particularly cloudy for obvious reasons.  Biden may be ahead in polls, but the world already learned not to count out Trump based on polls in 2016.  Plus, a lot can happen between now and when votes are cast.  Even if a trader thinks they know who will win, they can only guess at how the rest of the market will react.  As such, it makes sense to wait and see what's what in  November.

The second reason is the stock market.  It's in the midst of its biggest sell-off since the post-covid recovery began.  We can see enough intraday correlation that we cannot rule out the possibility that rates would be a bit higher without the stock market weakness.  That's not to say rates would just move higher and higher without finding a ceiling.  We'd still be in a broadly sideways range for all the reasons that we're in a broadly sideways range in the first place.  The ceiling would simply be higher than it has been for the past 45 days.