MBS RECAP: From China to Europe, Bonds Benefiting From Overseas Drama

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Interestingly enough, the most interesting thing that happened to the bond market today happened in the overnight session.  It accounted for most of the movement, and it brought bonds exactly to the levels seen at the end of the day. 

The event in question was news that Italy would defy EU budget rules in an attempt to stimulate its economy.  This is the sort of thing that gets investors thinking about systemic risk and degradation of the EU monetary system, even if only slightly.  In turn, core EU bonds tend to benefit noticeably, and those gains tend to spill over to US bond markets (which is exactly what happened overnight).

Weaker Retail Sales and Industrial Production added to the bond market gains, but it was ultimately Europe that was in control.  The EU rally bounced in the morning hours and stocks moved higher as well.  All of the above coaxed Treasury yields off their lowest levels, though not above 2.39%, give or take.  In other words, bonds still managed to hold an impressive amount of the gains today (and ALL of the overnight gains) to end at the best levels since late March.  Only one other day has been any better in well over a year (in terms of closing levels anyway).

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