MBS RECAP: Don’t Call It a Comeback

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Bonds made some gains today, much to the relief of anyone who didn’t really care to see rates explode higher after hitting long-term lows last week.  Such people are not unreasonable–i.e. they don’t expect rates to only ever go lower.  Rather, when rates find themselves needing to go higher, it’s preferable if they can manage such things in an orderly fashion.  Yesterday was anything but orderly…

Today was extraordinarily calm by comparison.  Volumes were the lowest in weeks and the trading range was as narrow as it’s been since before the March Fed Announcement.  Bond traders were buyers right from the start of the overnight session, and with no particular motivation apart from the brutality of yesterday’s weakness.  This is a really good sign, all things being equal as it doesn’t suggest an utter unwillingness on the part of traders to step in front of what looked to be a fairly determined selling spree.  That’s especially good when yesterday’s selling spree was clearly fueled by stronger economic fundamentals (in part, anyway).

But don’t call it a comeback.  Today’s gains merely restore some balance to the current week’s narrative.  It’s still bad for bonds in the bigger picture, but just slightly less bad than yesterday.  It continues to be the case that the rest of the week’s economic data has the best chance to set the tone from here on out.  Tomorrow’s most important reports are ADP employment at 8:15am and ISM Non-Manufacturing at 10am ET.

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