There was active trading overnight among a diverse group of market participants. Most importantly, that group included what’s known as “real money” buyers. These are non-speculative, non-leveraged accounts such as foreign central banks and insurance/pension funds. This was largely an Asian affair overnight and when Asian markets closed, bond market positivity waned.
European trading was helpful at first as German bond yields broke below a short term floor in yields. But the boost was fleeting. German yields didn’t make it far before bouncing on a much longer-term floor–one that also saw a bounce on Nov 4th. These sorts of “double bottoms” can be seen as an ominous technical indication that yields might be headed the other direction.
That said, it’s too soon to conclude that Friday’s gains will be revoked. In both European and domestic markets, corporate debt issuance continues at a relentless pace. That means two things for bond markets. Less important is the fact that bond market investors may “make room” to buy corporate debt by selling Treasuries/MBS. More important is the fact that corporations that announce impending bond offerings will often “lock” their borrowing costs by selling Treasuries. While it’s true that these hedges are frequently bought back at a later date, big corporate issuance slates leave a glut of net selling pressure between the time the corporation’s decision to issue and the final pricing announcement.
Last week’s slate of corporate issuance was huge. This week’s will be almost equally as huge when adjusted for tomorrow’s day off. Firms are scrambling to lock in these low funding costs after Friday’s rally offered a reprieve against the recent trend. And all that is taking place against the backdrop of what otherwise isn’t a very active market today. Long story short, of the fewer-than-normal traders clocking in today, most are sellers. This, in turn, trips algorithmic triggers that automatically add to the selling, making for a quintessential “snowball” of forced movement higher in yield.
With Treasuries being the primary vehicle associated with the weakness, they’re taking things a bit harder than MBS, which are merely along for the ride by comparison. Still, that’s little consolation when we’re already down a quarter of a point from Friday’s latest levels.