MBS RECAP: Confused, Complicated, but Comforting Trading in Bond Markets


I haven’t seen many days with as many different relevant considerations for bond markets, but if you don’t really care about the details, the only important thing to know is that we held steady and even saw solid gains by the end of it.

The complications and confusion began with ECB President Draghi’s press conference.  Roughly half the market expects some tangible new action on sovereign debt purchases.  Half of that half was quite sure that wouldn’t come until 2015, with everyone else simply not believing that the ECB can pull off actual sovereign debt purchases.  Listening to Draghi this morning, all 3 of these camps had several opportunities to stand up and cheer.  By the end of is though, there was no money printing announced today and tell-tale Italian yields and Eurodollars suggested markets felt a bit defeated on QE prospects.

An ABSENCE of European QE has paradoxically been a neutral-to-good thing for domestic bond markets.  The thinking goes: if the ECB isn’t doing QE, things are just going to deteriorate in terms of global growth, thus benefiting the safest-havens like the US and Germany.  We did get some of this type of trading right out of the gate.  It reversed later in the speech, but was exacerbated by completely unrelated tradeflows in the US (owing to new corporate bond issuance, which prompted Treasury sales).

The afternoon saw the other side of corporate bond hedging where companies that had sold Treasuries to lock in their rates, finally priced their deals and were able to buy back the previous hedges.  This gave Treasuries a bit of a boost late in the day and tripped technical levels for algorithmic buying as well as short covering (traders who’d been betting on higher rates subsequently being forced to sell as the market improves enough to threaten their gains).

At the end of the day, MBS had soaked up a good amount of the Treasury-led positivity and ended a quarter point higher.  10yr yields dropped nearly 5bps ahead of tomorrow’s NFP.

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