For the second straight day, MBS are coasting toward the close having held a narrow 4/32nds range for most of the day, having seen little, if any threat of major weakness. Today was a bit different than yesterday in that it started out in weaker territory. The weakness in Treasuries was fairly minimal overnight, but the stronger economic data at 8:30am took bond prices to new lows.
20 minutes later, the reversal was underway. By far and away, the most popular explanation out there is that the bond market strength and stock market weakness came courtesy of Ukraine-related headlines. There were a few stories circulating at the time, including word of “military drills” as well as press conference with Putin. That said, none of the headlines line up with the big market movements in any satisfying way.
Instead, the geopolitical situation is more of a supportive underlying canvas on which the day’s activity is painted. The specific instances of spiky movement had as much to do with ebbs and flows in stocks as anything. While it’s an understandable argument to say “well sure, but stocks were having their own spiky movements because of geopolitical risk,” that absolutely has not been the case on several recent occasions where bond markets have responded to a Ukraine-related headline while stocks did not.
There’s no question that geopolitical risk is a consideration for markets and also no question it was a convenient excuse for markets to do what they very likely were going to do anyway. The only real takeaway from this mess (where there isn’t broad agreement on why markets are moving the way they are) is that it increases the prospects for volatility heading into next week’s Fed meeting and employment data.