MBS Live Week Ahead: Brexit's Still a Thing? Yes! And It's Helping Bonds Hold Their Ground

It was impossible to avoid Brexit-related headlines in 2016.  Indeed, they were the driving force behind Treasury yields hitting new all-time lows at the time.  Since then, the seriousness of the Brexit conversation has waxed and waned as various deadlines have come and gone.  As recently as October 2019, this was one of the key talking points for US bond markets, culminating in official withdrawal at the end of January 2020.  After that, the UK had until Dec 31, 2020 to hammer out a trade deal with the EU.  With 3 weeks left for such things, and several sticking points clearly unresolved, markets are paying more and more attention.  

This isn't destined to be a dominant market mover for the US bond market, but as the new week begins, it is enough to help Treasuries come out of the gate in slightly stronger territory.  How do we know?  First off, there is almost always a moderately strong correlation between EU and US bond yields, all other thing being equal.  Here's how UK, US, and EU (Germany) 10yr yields were trading before last week's dust-up in Treasuries.

Advancing the chart to the present day, we can see how clearly the overnight Brexit headlines affected EU markets (especially UK bonds).  Although the magnitude of the sympathy rally in Treasuries leaves a bit to be desired, it is definitely a sympathy rally.

For the remainder of the week, US bond markets will continue debating the merits of holding under 1.0% (in 10yr yields) as they digest the 3, 10, and 30yr Treasury auction cycle as well as any new developments on the fiscal front.  For mid-December, a lot is going on right now between the technical landscape in bonds (i.e. the challenge to the support levels in the mid 0.9's), the potential stimulus/omnibus spending deal, and next week's Fed announcement (which may or may not contain a tweak to the Fed's bond portfolio maturity weighting. 

Depending on how these variables shake out, there's a scenario where yields are moving quickly up and over 1.0% and another where they're dropping quickly into the 0.8's.  In either case, MBS would be less inclined to move as quickly in the same direction and the same is doubly true for mortgage rates themselves.