Much-Anticipated Correction Finally Arrives. Now What?

This morning's alert noted a scary scenario playing out in bonds due to a confluence of big picture negative motivations (power shift in D.C., ruminations about Fed tapering, brighter covid/econ outlook as vaccines roll out, and the general need to correct the extended stay in a record low range).  Just as it makes sense for bonds to push back against months of sub-1% yields in the bigger picture, it also made sense that bonds should be pushing back on the shorter term selling spree that accounted for a quick spike of more than 30 basis points in 10yr yields by this morning.  As of this afternoon, we finally have the first evidence of such a push-back.  It remains to be seen whether it's the start of any additional friendly momentum, or a mere 'leveling-off' of the recent negative momentum.

Econ Data / Events
Market Movement Recap
08:31 AM

The bond market meltdown continues.  The more negative scenarios we imagined heading into the new year are playing out exactly how they ran the risk to play out.  Negative momentum is its own justification at this point.  10yr yield drifted steadily higher overnight, now up 3bps at 1.175.  MBS are down about a quarter of a point.

10:36 AM

More meltdown, specifically for MBS (listen to yesterday's video about "convexity selling" for reasons behind the extra poor performance in 1.5 coupons), which are down between a quarter and 3/8ths of a point on the day, and well over an eighth of a point from the morning's highs.

12:13 PM

A bit of a recovery now, led by stock selling at the top of the 11am hour (and by MBS simply being oversold enough to entice dip buyers).  UMBS 2.0 coupons have clawed back most of the intraday losses, up to 102-19 (102.59) now after being as low as 102-11 (102.34).  10yr yields are back down to 1.170 after briefly hitting 1.187.

01:08 PM

Decent 10yr auction, helps reinforce earlier ceiling bounce at 1.187% and the MBS recovery from intraday lows.  Trading levels are currently only slightly weaker (unless you're looking at UMBS 1.5 coupons) with MBS down less than an eighth now, and 10yr yields up only 1.6bps on the day.

02:34 PM

Now moving into positive territory on a combination of short-covering and new buying (big block trades in futures).  Lots of pent up energy for a correction/consolidation we'd almost given up the hope of seeing.  10yr now down 1.3bps and more than 5bps from the highs.  UMBS 2.0s are now an eighth of a point higher on the day!