If you’ve been surprised by the extent to which US bonds have been hit by European inflation reports over the past month, you’re not alone. Admittedly, the impact on the US is first and foremost a bigger mover in EU bonds and EU bonds are also selling for other reasons, but inflation reports have been one of the most important. So it’s interesting to see headlines overnight about “record inflation” in the Eurozone and no sell-off in the bond market.
Indeed, there was some good upward pressure on EU yields during the overnight session, but most of it happened on the open for reasons other than economic data. Most of the selling was done before the release of the inflation data and EU yields returned to levels seen before the data release.
Part of the reason could be that month-over-month expectations for EU inflation were 0.6% and the actual reading only came in at 0.5%. The year-over-year reading of 9.1% was very much in line with expectations, although it was a record. In other words, the record was the forecast, and that probably served to limit the impact.
National data has not been strong and bonds are generally sideways today, trying to hold below the 3.13% technical level. In the context of the past few weeks, there are also arguments for a moderate uptrend in yields, so we wouldn’t be sleeping on 3.13%. Very important resistance has also emerged over the past 2 days at 3.104. All bullish bets are off until and unless this is broken.
In other news, let’s check MBS liquidity since we haven’t in a while and since 6.0 coupons appeared in the chat this morning. The chart should speak for itself, but the big takeaway is that the 5.5 and 6.0 coupons aren’t close to being liquid.
The 5.0s are doing much better than before, but if we remove the outliers and redistribute the y-axis, there is still a significant gap between the 4.0, 4.5 coupons and the rest.