Today was all about the afternoon’s 5yr Treasury note auction, which garnered the best demand in more than 2 years and the highest percentage of indirect bidders (which generally indicates foreign demand) ever!
10yr yields were already slightly lower on the day, but they dropped another 5bps in short order. Fannie 3.5s were already up an eighth of a point on the day, but added another quarter point after the auction. It was definitely the strongest move of this late-December bond market malaise.
That “late December” context is also an asterisk for the rally. In the big picture, today’s volume was quite light and the size of the move, only slightly above average. Moreover, 10yr yields continue to operate above 2.50%. Until we see a big break lower (at least below the 2.42/2.44% area), bond markets are best characterized as “hovering around 2.50% to end the year after a sharp move higher from roughly 1.80% in early November.” That’s not to say today’s rally couldn’t grow into something more, just that we haven’t seen any signs of such developments yet.