The simplest and easiest way to approach bond market movement is to simply follow economic data and analyze the moves in the context of that data. While big econ data can always move markets, it’s never the only game in town. At times, those “other” games can get so big that they dominate the action. Now is one of those times.
It has been the case for months that the European economy and monetary policy stance are big net-positives for US bond markets. I talk about it incessantly enough anyway. This is the first “big game” and yesterday it finally coaxed 10yr Treasuries out of the uptrend (in red below) that had been intact since late May. From there, the 2nd “big game” took over and carried yields all the way to the boundary of the counter-trend (in teal below).
That 2nd game refers to the confluence of geopolitical risk represented by Ukraine, Gaza, and now US air strikes in Iraq, as announced last night by the President. Hopefully that last addition is as anticlimactic as it can be, but at first, there’s no question what such a headline does to financial markets. The air strike headline single-handedly accounts for the surge in early overnight trading.
So that leaves us with a Friday to focus almost exclusively on geopolitical risk. The more it flares, the better for bonds. Even if it’s not flaring, there’s always the pervasive European economic weakness to keep US bond yields well-enough anchored. At the present moment, there’s an almost uncomfortably low amount of upside risk for US interest rates.
There is some frustration though–depending on how picky you want to be. This concerns the MBS underperformance. While it’s no surprise that MBS won’t respond as quickly or as much to geopolitical flights-to-safety, Treasuries are really pulling ahead right now. Keep in mind that MBS ROLL tonight, so prices on charts will look even worse by comparison on Monday. This chart shows MBS and Treasuries (the y-axis for Treasuries is inverted to show the correlation with MBS Prices. Treasury prices won’t work due to auctions resetting the coupon) lining up in late May at the strongest levels, and then again in June and July. Those bookends set the playing field (in other words, “they lined up here and here, but now look what’s happening“):
Long story short, if this geopolitical rally persists, it’s great and all… just not quite as great for MBS and mortgage rates.