MBS RECAP: Strong Start And Weak Finish Leave Bonds Little-Changed


The bond market started the day off in much stronger territory after solid overnight gains.  These could be viewed as a factor of weak equities markets or simply due to a general risk-off trade that has been going on for the entire month of May.  Either way, each additional notch toward lower yields raises the risk that the rally will bounce if for nothing other than technical reasons.  Paradoxically, the expectation of a bounce toward higher yields can fuel further gains due to short squeezes.

As far as actual events causing fear of bounces, today’s 7yr Treasury auction was nothing like the 2 and 5yr varieties seen so far this week.  It was quite a bit weaker than expected.  In its defense, the auction occurred at what were nearly the best yields seen in well over a year, but weakness is weakness.  

Yields bounced decisively after the auction in yet another example of “something that fuels fears of a broader bounce.”  It continues to be the case that next week–which is chock full of market movers–is the bigger deal for the fate of the market near-term, but the auction might be viewed as a “lead-off” in retrospect.  If you’re antsy about all the recent gains, take that for what it’s worth.  Otherwise, we just have a few more days to get through before the real info and real trading hit.

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