MBS MID-DAY: Bond Markets Erase Most of Yesterday’s Gains


Once you accept the truths in yesterday morning’s chart (re-posted below), the rest of 2013 doesn’t really matter.  To recap:

  • June 19 was the date of the FOMC Announcement in which the Fed formally introduced tapering prospects, prompting a 45bps sell-off over 4 days with one little phrase “The Committee is prepared to increase or reduce the pace of its purchases.”
  • On June 20st, 10yr yields closed at a new high of 2.471, and that has been the lowest closing level ever since.
  • October 23rd (3rd white circle below) saw a moderate extension of the previous day’s strength (NFP-related) collide perfectly with 2.471 and subsequently get resoundingly rejected.
  • This is the point at which the government shutdown is one week in the rearview and market participants took the Fed at their word regarding Fiscal constraints holding back tapering.  As such, bonds began moving slowly, surely toward levels more consistent with tapering.  The NFP report on Nov 8th provided some volatility, but nothing compared to that seen over the past 4 months.
  • From that point on, the sell-off was incredibly narrow and linear in it’s move back to 2013 highs.

In short, we had some measure of fiscal healing, and had arrested the potentially troubling slide in job creation (no one’s saying it’s awesome–simply that it stopped heading in the wrong direction).  All of the above equates to gradually rising rates.  3.0% 10yr yields is where the market went when it was convinced it would see tapering in September and it’s no surprise to see it back now that tapering is official. 

It’s a fitting place to end 2013–right on the edge of the highest levels in more than 2 years.  The ominous suggestion is that rates in the 2’s will be more of a “2013 thing.”

While that can’t yet be known, what we can unequivocally know is that this morning’s economic data (Case Shiller, Chicago PMI, Consumer Confidence) hasn’t mattered at all compared to year-end position-squaring.  Bottom line, Someone wanted/needed to sell quite a bit more Treasuries than everyone else heading into 11am.  That took bonds from a sideways grind around 2.99 to a sideways grind around 3.01 instead.  It’s all pretty uneventful in the big picture.

Treasury Chart

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