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MBS Underperform as Treasuries Benefit From Flight to Safety

When the market is sensitive to potential changes in the Fed’s policy stance, it’s not uncommon to see stocks and bonds win and lose together (i.e. stock prices rising while bond yields fall and vice versa).  When markets are reacting to some unexpected risk to the economy, it’s normal to see stock prices and bond yields move lower together.  Today was a better example of the latter (the proverbial “risk-off” trade and/or flight to safety) following a slew of bank downgrades by Moody’s.  Some would say that weak economic data in China contributed and they may not be wrong, but today certainly wasn’t the first day in recent memory with disconcerting data out of China, and none of those recent examples prompted as big of an overnight rally.