The topic of month-end trading comes up frequently over the years. Reason being: we often see market momentum on the last few days of any given month that can’t be easily explained by any other motivation. And while we wouldn’t be so naive to think that every noticeable market movement will have an identifiable explanation, month-end trading is definitely a thing and it definitely CAN be one of the best explanations for otherwise unsolvable mysteries.
So what is it, exactly?
A certain portion of the trading community is required to hold a certain mix of bonds by the end of the month. The mix is determined by indices (such as the Barclays Aggregate Bond Index). The final number is a bit of a moving target right up to the last day of the month. Traders could either be positioned with too many or too few of any type of bond. They then must adjust accordingly to hit the index value. That is a drastic oversimplification (seriously, the quick and dirty help guide for the index methodology is 117 pages), but the point is that compulsory trading needs among money managers can have a bigger effect on market movement near the end of any given month.
Sometimes this has a clear effect and sometimes it passes without a trace. Sometimes it’s positive for bonds. Sometimes it’s negative. And sometimes, what looks like month-end trading is actually something else. Is that the case today?
First off, we’ve already seen several big trades this morning that are almost certainly related to month-end. It’s harder to say whether or not they’d make much of a difference given the technicals in play. Simply put, bond momentum is rotten, and there’s plenty of room in the trend channel for rates to move higher if they’d like. We could look for support at .88% in 10yr yields, but .879% would still be more than enough weakness to put a damper on the day.
Will stocks save us? After all, they’ve been falling significantly this week, and sometimes that money seeks a safe haven in the bond market. Unfortunately, this week’s stock losses really haven’t translated to anything great in the bond market (perhaps on the first 2 days of the week, but not since then). In the bigger picture, stocks are in a massive consolidation pattern. From a strict technical standpoint, a break below the lower yellow line could signal more selling while a bounce implies a move back to the upper yellow line. While we wouldn’t suddenly assume that stock strength would hurt bonds after we just discussed opposite case being untrue, we can at least conclude it wouldn’t make things any easier for bonds. In other words, if stocks recover, it wouldn’t deter the longer-term trend in the bond market.
Of course it could be that all of this is much ado about nothing with the election looming next week. Money could simply be flowing out of both sides of the market, into cash. In that case, I’d warn that traders are only going to price in a certain percentage of the expected election result. This is NOT a “sell the rumor, buy the news” sort of deal. It’s more like “sell half on the rumo and the other half on the news.”
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-03 : +0-00
0.8518 : +0.0158
|Pricing as of 10/30/20 10:51AMEST|
Tomorrow’s Economic Calendar