Asian equity markets sold off to begin the overnight session with a stronger Yen helping push the Nikkei down 2.6%. That set a risk-off tone that persisted through the early morning hours of the domestic session with the biggest jolt of improvement for bond markets coming after equities futures bounced off a short term ceiling at 6:25am.
That was part of broader phenomenon that’s been playing out fairly consistently ever since Bond markets hit recent multi-month price lows in the past two weeks. It’s characterized by Treasuries (and to a lesser extent MBS), improving more when stocks are declining and weakening less when stocks are gaining, but most of the time, maintaining that positive correlation. In other words, the stock lever is well connected moment-to-moment, but bonds have been outperforming, winning small victories here and there. Perhaps that’s to be expected after cresting 1.9’s in 10yr yields…
But what about MBS? They haven’t been doing as well as Treasuries for most of 2013 so far. Here too, there’s the same minute-to-minute correlation seen between stocks and bonds, but Treasuries are winning those smaller victories as well. Several likely motivations include the ramping up of new origination supply after the holidays (see MBA Apps up BIG this morning) as well as the longer term range-finding of MBS spreads vs Treasuries. They’d risen to multi-month highs in mid-November and have been steadily declining (or “tightening”) until Treasury yields topped out after January NFP.
Additionally, Treasuries just generally “lead” risk-on/risk-off moves in bond markets with MBS tending to make smaller versions of the same movements (don’t forget that MBS were relatively A LOT less damaged by the December to January Sell-Off than Treasuries. Turnabout’s fair play).
That brings us to the morning situation where Fannie 3.0s are up 3 ticks vs yesterday at 104-14 while 10yr yields are up 7 ticks in price, bringing yields 2.24 bps lower. Morning data has been a non-event and generally untraded. Stocks have been rising since 7am and are currently revisiting the same ceiling mentioned in regard to the overnight session (1464 in futures, currently equates to 1459 in cash SPs). If Treasuries are as connected to stocks as they seem to be (on that minute-to-minute basis), then a break above that ceiling in stocks could be the signal for Bond markets to re-visit their weakest levels of the morning. We’re pretty close right now, so maybe we should say, “if stocks break higher, so may bond markets,” though the impending Fed buying at 10:15am could throw the correlation off for a bit.