Last Friday I said that bond traders had “had enough” when it came to reacting to every little tax bill headline. That theme held true today, but now we might also say that traders have “had enough” of active trading for the year as well. In fact, last week’s recap touched on this topic in discussing the waning liquidity heading into the end of the year (i.e. last week was characterized as “last call” for active trading).
A highly liquid marketplace is a bustling marketplace. Late December sees the bustle die down among bond traders. There is still plenty of money changing hands, but a far greater percentage of it is now being driven by boring, compulsory factors, like year-end portfolio adjustments and general hedging activities that don’t even register on the scale of importance during more liquid times of year.
All of the above adds a certain randomness and unpredictability to intraday movement. It means we don’t have to rush to understand any intraday move that leaves the broader range intact (as today’s did). Still if we want to assign blame, the best place to look is the bounce in the yield curve (2yr vs 10yr yields for instance), which bottomed out again by the end of last week, basically matching the post-crisis record. Traders were clearly backing away from that trade to start the current week. The chart from one of today’s updates on MBS Live shows how the curve (green line) was leading the way for outright 10yr yields (yellow line). This only became more pronounced as the day progressed.