The most tabloid-worthy market moving headline this morning claims to essentially leak the details of tomorrow’s ECB Announcement and suggests sterilized, unlimited purchases in up to 3 year maturities. Those facts in and of themselves would not come as much of a surprise given that Draghi has said twice this week, that maturities up to 3 years are fair game within the framework of the Euro zone treaty. Nonetheless, it SOUNDED pretty serious and for a few minutes, 19 to be exact, markets took it seriously, with German Bunds rising from 1.40 to 1.43 in roughly 5 minutes, and falling back below 1.40 19 minutes after the news.
The much bigger deal this morning, and the one that has created the real weakness for bond markets was the relatively weak German Bund auction overnight. This doesn’t really suggest anything beyond uncertainty ahead of bigger-ticket events over the next two days and weeks, but was certainly enough for a short term course correction, contributing to a 7bp move higher from lows to highs in German Bunds overnight.
Domestic bond markets have followed faithfully, but in a SIGNIFICANTLY lower magnitude. The same move that created 7bps of movement for Bunds was about half as big in US 10’s. After the gyrations from the ECB head-fake, higher-than-expected productivity didn’t help bond markets bounce back, even if it didn’t create any big volume reaction.
Thus, we find ourselves a few ticks weaker in MBS, themselves following Treasuries in a lower magnitude just as Treasuries followed Bunds. We’ve traded a few ticks on either side of positive/negative this morning, but are currently down 3 ticks at 103-21 at the lows of the morning. 10yr yields are at their highs–1.594–as risk markets have moved higher in concert (Euro, peripheral debt prices, stocks, Bund yields, to name a few). Next major pivot for 10yr Treauries is at 1.61. Drifting higher between here and there would essentially be a non-event whereas crossing into that territory could coincide with bigger waves reaching MBS’ shores.