It was a day for "explanations" in the bond market with the morning rally needing to be explained in the context of CPI data that came in right on the screws and a subsequent sell-off that also seemed to happen for no apparent reason. In fact, selling continued even after the well-received 10yr Treasury auction. To some extent, the AM selling can be tied to the Bank of Canada announcement, which was universally panned as ultra-hawkish (despite a 0.50% rate cut). The continued selling is more mysterious and can only really be explained with curve trading and repositioning following the AM CPI data. The big clue: Fed Funds Futures for next week rallied and never sold off. But the farther one moves into the future, the bigger the reversal became. Bottom line, traders sold long term bonds to buy the shortest term debt and the buying hasn't even necessarily taken place yet.
Weaker overnight and stronger after CPI. MBS up 7 ticks (.22) and 10yr down 0.5bps at 4.216.
10:30 AM
Giving up gains. MBS up only 3 ticks (.09) and 10yr up 1.8bps at 4.239
01:14 PM
Strong 10yr auction, but being traded in more of a "no whammies" kind of way. 10yr still up 2.3bps at 4.243 and MBS unchanged.
02:07 PM
New lows with MBS down an eighth and 10yr up 5.4bps at 4.275
Lock / Float Considerations
Wednesday's mid-day reversal for bonds raised questions for risk-tolerant clients who'd been waiting for a big enough reversal to serve as a lock cue. While the damage was minimal in outright terms, it brings yields to the highest level in 2 weeks and it does so against a data backdrop that would not necessarily justify such weakness. Risk averse clients have been and continue to be lock biased.
