The day began in fine shape, especially in light of the stronger reading on GDP. European bond market strength remains at the heart of our ability to hold ground that otherwise seems out of reach. German Bunds, Europe’s 10yr benchmark, pushed down to .77% on Friday and looked like they might bounce yesterday. But today saw another rally down to .75% this time. This was significant because it happened in spite of Germany’s GDP holding in positive territory today–something market participants reckoned would be negative for bonds overnight.
We had a GDP reading this morning as well. Not only was it much stronger than expected, but there weren’t any major caveats to the strength. Internal components were broadly stronger and “inventory-building” didn’t prop up the number (in fact, it detracted a bit!). So it came as a bit of a surprise (or “hint” perhaps?) when bonds never really sold off in the morning. There was some weakness at first, but Treasuries and MBS never went too far back into yesterday’s territory before vaulting to stronger levels.
The most noticeable vaulting followed the 5yr Treasury auction, which was exceptionally strong. This kicked off a weird, condensed, holiday-inspired version of a snowball rally that saw massive Treasury futures and options trading. MBS Live subscribers got a more detailed account of the afternoon tradeflows, but suffice it to say we say a good example of what can happen when buying motivation increases abruptly on a holiday-shortened weak that falls on the end of the month.
When all was said and done, 10yr yields stood just under 2.26 and Fannie 3.5s are a tick away from 104-00!