MBS RECAP: Bond Traders Have Had Enough


Bond traders are increasingly saying “enough already!” when it comes to reacting to every little push and pull in the tug-o-war over the tax bill.  After headlines suggested Rubio may be pulling his “yes” vote yesterday, today’s news was different.  Concessions were made and the GOP once again had enough votes to move forward.

Stocks and bonds moved lower together with yesterday’s Rubio headlines and higher with today’s.  Granted, this was a much bigger deal for stocks, but bonds were taking part nonetheless.  That is, until this afternoon when bonds decided enough was enough and proceeded to rally back toward ‘unchanged.’

Was it really as simple as bond traders getting fed up with all the political horse-trading?  No, not even remotely.  Bond traders have figured that Trump + a republican House and Senate would mean increased bond market issuance at some point.  The only question is what it looked like.  As of this afternoon, it looks like another 1.456 trillion dollars of debt for the US (though some of that will ostensibly be offset by stronger growth and repatriation incentives. 

What was the afternoon rally all about then?

A) It doesn’t much matter because we’re flat and in the middle of a broader, super flat range.  Volumes and participation have declined over the past 2 days as well, and traders are already tuning out for the holidays.

B) With traders already tuning out for the holidays, today would have been an ideal “last call” for liquidity when it comes to month end trading needs.  It’s not that traders necessarily set their final positions  for the month today.  Rather, they simply made sure they were stocked up on what they needed (or didn’t need) in order to avoid scrambling to take care of business when it’s harder to take care of at the end of December.  In today’s case, this meant bonds improved modestly.

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