Bond markets were stronger all day, with every ancillary consideration seeming to help them along. Right from the start of the overnight session, weaker data out of China got credit for hurting equities and helping bonds. The equities theme would ultimately dominate the session as SPs lost a mighty 20+ points.
Bonds continue displaying a good amount of correlation with stocks and today was a shining example. Related markets were on board with this as well, particularly Japanese Yen.
The strong correlations remind me of the Eurozone crisis where we could reliably predict that several financial metrics would move in unison. The reason it’s working again right now is likely the same as it was then: “risk-on vs risk-off” trading. Risk-off trading easily explains just about everything we saw today, including the fact that MBS had a hard time keeping up with Treasuries.
Even so, there was plenty of positivity to lift Fannie 4.0s to their best levels of the year. 10yr yields crushed their previous boundaries though, moving briefly into the high 2.75’s before moving back to 2.77-2.78 into the close. The extent of that crushing looks like it has more to do with the broader “risk-off” environment today. Stocks would have to put up a repeat performance tomorrow for bonds to even gain half the ground gained today. There’s just not enough motivation for a much bigger move unless the FOMC endorses it by holding off on tapering next week.