Much of the volatility in late April and early May has been frustratingly opaque in terms of traditional cause and effect relationships.  We were forced to resort to discussing things like tradeflow momentum and corporate issuance to explain movement.  While these two esoteric factors are always in play to some extent, it's much easier to accept them when they're pushing in the same direction as the economic data.  That was the case today.

In terms of the aforementioned esoteric stuff, we had positive tradeflow momentum right off the bat in the overnight session.  US Treasuries stayed green, defying European bond market momentum which carried German Bunds into negative territory just after 5am.  Whereas European bonds would never make it back into positive territory, Treasuries bounced in order to remain in positive territory this morning.  MBS generally went through the same motions, but underperformed Treasuries most of the day.

The data-based justification for the rally came in the form of weaker-than-expected Philly Fed and Existing Home Sales at 10am.  Bond markets made it a point to not break back above yields in place at the time of those data releases (another promising sign).  After the 1pm TIPS auction, the last leg of the rally came quickly.  As I discussed in an update on MBS Live, it wasn't necessarily because of the stats of the auction, but rather the auctions role as precursor for afternoon liquidity.  In simple terms, traders had to wait for TIPS to pass (primary dealers are required to bid) and then were more free to do what they wanted.  For many, that was the opportunity to make the last trades of the week as absences will drastically increase for tomorrow's half day.