MBS MORNING: Moderate Gains On Low Volume

By: Matthew Graham •

MBS and Treasuries are both up on the day with the 4.5 gaining 6 ticks to 101-09 and the 10yr up 7 ticks, dropping the yield to 3.455.  Supply is light in the mortgage world while demand remains "less light" courtesy of the Fed and servicers adding duration in the persistently low rate environment.  But the ongoing caveat of LOW VOLUME remains.  New originator supply is struggling to show 500 mil and 10yr contracts only recently crested 350k. 

Volume is almost too low to read much into this AM's high yields in the 10yr coinciding with yesterday's low yield.  Given yesterday's similarly low volume in conjunction with yield curve steepness (among other things), there's a lot riding on this auction.  As AQ mentioned earlier, it's the week's first decent look at demand for duration and a perennial opportunity for a "relief rally."  In other words, yields have normally been backing up ahead of auctions and rallying upon "as expected" or better results. 

Perhaps a small portion of this morning's strength is baking in some of that relief on the heals of the excellent 3yr auction yesterday.  But the extent to which that end of the yield curve informs today's auction is minimal at best.  Not much else to go on so far this week however, as fed-speak is covering for the absent econ data.

In that vein, some of the highlights include:

  • Lockhart
    • most important part of FOMC statement was "extended period" language
    • could imagine situations in which fed would hike rates even while unemployment remains high
  • Yellen
    • Recovery still in question
    • financials still hurting from bad loans
    • governments and central banks play big role in stemming downturn
    • housing market stabilized, but foreclosures could continue to create price pressure
    • deflation risk outweighs inflation
    • commercial real estate worriesome
  • Rosengren
    • banks "too large to fail" is a bigger problem than ever
    • doesn't see restrictions on banks activities as an effective way to limit systemic risk
    • give big firms the responsibility and authority to address systemic risks.

All that has done little to move the market...  As AQ pointed out in the open, we'd expect yield to back up a bit into the auction, but whatever happens BEFORE 1pm will be of little to no consequence compared to what can happen AFTER.  And for that, we are beholden to the auction results which we'll cover as soon as they become available..  See you back here soon!