Heading into today, it stood to reason that the normal spat of supportive, compulsory bond buying that occurs at the end of the month would have already taken place by Wednesday. That made good sense considering the holiday environment (fewer sellers around on Friday should motivate buyers to take care of business earlier in the week).
Indeed a solid amount of month-end buying was seen on Wednesday, helping bonds hold strong overnight gains. But apparently there were more buyers lurking in the shadows or otherwise unprepared to strike while their iron was hotter on Wednesday.
Unfortunately for those buyers, there aren’t many sellers around at the moment, leaving an inordinate amount of competition for supply. Naturally, this is driving prices higher, and the move is magnified by the lower overall volume and liquidity. (If this is confusing at all, just imagine an old-fashioned auction with 3 people who each came to the auction knowing they would bid whatever it took to get their hands on a particular item and who weren’t expecting to run into two other people with the same goals. What would happen to the price of that item? That’s exactly what’s happening to the price of Treasuries and MBS).
But in bond markets, it’s not just the competition for one item that’s driving prices higher. It may start the ball rolling, but as prices rise, algorithmic trading signals are tripped and prices are bid up further (or to go back to the auction analogy, imagine there are sleeping robots in the audience who automatically wake up and raise their paddle when the price goes high enough). The end result is a snowball rally, which is exactly what we’ve seen this afternoon. With just over 30 minutes left before the early close, 10yr yields are at 2.175 and Fannie 3.5s are 3/8ths of a point higher at 104-11.