Japan’s surprising poor GDP miss was the main event in the overnight session, resulting in bond market strength right out of the gate. Although Treasuries had weakened somewhat by 8am, MBS were still able to begin the day more than an eighth of a point higher than Friday’s latest levels.
The general pull-back that began overnight continued into the domestic session. Tough talk on QE from European Central Bank (ECB) officials actually hurt bond markets. That’s not the typical reaction, but it is typical of the recent dynamic surrounding European QE. Reason being: markets have been concerned that the ECB wouldn’t or couldn’t do enough to buoy the struggling European economy, and those growth concerns were fueling bond market strength. Consequently, reassurances about QE are having a negative impact on bonds as they allay those growth fears, and that negative impact outweighs the positive impact that would be seen from additional cash coming in to government bond markets.
Corporate debt issuance also continues to cause volatility for Treasuries. This happens when companies plan to issue corporate bonds and use Treasuries to hedge against market movement during the process. Long story short, Treasuries are effectively sold in order to lock a portion of the company’s eventual interest rate. They can later be bought back, but there’s no set schedule as to when that would occur.
The net effect is a Treasury market that’s noticeably weaker than MBS today. 10yr yields are up 2bps while Fannie 3.5 MBS are actually 1/32nd into positive territory (hence MBS “outperforming”).