Coming into this week, the most logical base case was for a moderate correction in the bond market owing to the strong rally last week and the absence of data this week, all ahead of next week’s big CPI data.  The stronger-than-expected ISM data on Monday solidified that case.  The only problem was the massive global market volatility that peaked early Monday morning.  Now that stocks, USD/JPY, foreign bonds, VIX, etc. have all bounced, the week is falling more in line with the base case.  In fact, we are arguably slightly weaker at this point than the base case, considering 10yr yields are back above Friday’s levels.  The counterpoint is that the unwinding of the Yen carry trade began before Friday’s jobs report, so it could be that bond yields were a bit artificially strong at the end of last week.

As far as MBS outperformance is concerned, it’s notable today due to MBS being roughly unchanged while Treasuries are noticeably weaker.  But there’s a very big, very obvious catch, and it’s easy to see when we line up the movement in MBS and Treasuries over the past few weeks (note: this requires inverting MBS prices so the movement matches bond yields.  As such, lower=stronger for MBS in the following chart).