Early in the month (Feb 5th), bonds had their best day of the year as they soaked up a mere fraction of the cash that was fleeing from equities markets and looking for a safe haven. There was no such rout in stocks today, but bonds managed to put in a rather respectable performance nonetheless. Granted, it was nowhere near the same scale as the Feb 5th rally, but it was the best day of the year apart from that.
Early gains came courtesy of an ongoing rally in European bond markets. German Bunds are now back at yields not seen since late January. At that time, US 10yr yields were in the low 2.7s. The domestic session got a boost from NY Fed President Dudley, who not only refuted a just-released white paper labeling the Fed's bond buying as largely ineffective, but who also commented on the Fed's ideal balance sheet levels after the current normalization plan has run its course. Before today, Dudley was on record with a range of $2-3 trillion. Today, he just said $3 trillion.
Given that the Fed's balance sheet was less than $1 trillion before QE began nearly a decade ago, and that it was over $4.5 trillion at its peak, a mere drop to $3 trillion would leave quite a bit of bond-buying demand in place from the entity that's been the largest, most stable, and most guaranteed buyers of bonds for most of the past decade. Of course this was just one Fed member's remark and not some official policy statement, but Dudley's outlook matters greatly as market participants try to determine what the future of Fed bond buying might look like.
10yr yields ended the day down more the 5bps and Fannie 3.5 MBS gained a quarter of a point. If the gains can continue next week (especially if they can continue on March 1st), we'd be looking at our first legitimate correction of the hear. We'll count that chicken if it hatches though. So far, these eggs have suggested caution.