Today was fairly straightforward by the time the 10am ISM Manufacturing data came out.  It was significantly weaker than expected (worst since 2009) and resulted in a fast bond rally with high volumes.  We had been expecting this week to bring increased volatility because it contains the month's most action-packed economic calendar during a time frame where we know the Fed is watching the data more closely than normal (because they said so at the last meeting 2 weeks ago).

Before the ISM report, bonds were in weaker territory after overnight developments in Japan--a weak bond auction and, to a lesser extent, an operational change at the world's biggest pension fund that.  The pension fund news is nuanced, but the short version is that it fired a shot across the bow of negative interest rates being viable investments.  While that might seem like an obvious conclusion, there hasn't been a clever way for certain traders to avoid being forced to buy negative-yielding debt for various reasons.  The maneuvering by this pension fund may change that for some investors.

Despite the initial weakness, bonds managed to maintain a semblance of support  with 10yr yields avoiding a break above 1.75%.  The post-ISM rally took them as low as 1.613% in fairly short order, and most of those gains were intact by the close.  Fannie 3.0 MBS underperformed (again... they don't like volatility), ending the day up only 2 ticks (0.06) at 101-19 (101.59).