First thing in the morning, it looked like we had a chance to see another trade-war-driven bond rally. A Reuters story that detailed the US/China communication breakdown hit the market around 4:30am, causing both stocks and bond yields to move quickly lower. But by 7am, investors signaled they’d had enough. There’s only so much markets are willing to brace for when the worst case scenario is something that will play out in gradual fashion.
In other words, the worst case scenario is a gradual knock to global economic growth due to trade barriers as opposed to something like a change in central bank policy that has an immediate impact and a quantifiable implication for future cash flows. Markets are thus better-served to react to such things gradually.
The best case scenario, however, is the opposite. A trade deal carries significant negative consequences for bonds, so it’s not too surprising to see them balk when headlines make a deal seem slightly more likely.
Bonds were back in barely-weaker territory ahead of the 10yr Treasury auction. The auction itself was terrible–one of the worst in years. It’s actually a pleasant surprise that yields only rose by about 2bps following this one. But they did so all at once.
As expected, MBS fared better than Treasuries in the face of a sell-off, but were nonetheless forced into weaker territory. Many lenders issued negative reprices. Those who didn’t will be under increased pressure to adjust rate sheets tomorrow morning, unless we see a very friendly bounce overnight.