The Hits Keep Coming (the bad hits)

By: Matthew Graham •

MBS are down sharply after this morning's data.  5.5% coupons are down 13/32nds on the day bringing us all the way down to 99-02.

After yesterday's beating, which itself fell hard on the heels of a rough previous 3 days, we are down a total of 2 points (!!) peak to trough in the last 6 days.  That's pretty harsh.   

News Driving The Changes:

  1. GDP was released today almost dead on with expectations as the US economy grew by .9% in the first quarter.  The advance estimate reported .6% growth, and the analyst consensus was for 1%.  A key inflation component of the GDP report, Personal Consumption Expenditures fared slightly better than the expected 2.4% annual rate, coming in at 2.1%.  But this quasi-good-news for inflation is not helping bonds this morning. 
  2. Inflation, despite receiving some better than expected news in the GDP, is still high, and is still a major concern for traders, analysts, and several members of the Federal Reserve, including the Dallas Fed Pres speaking earlier this morning.  Since inflation makes a dollar today less valuable tomorrow, it destroys the return of bonds, so MBS must command a lower price if it hopes to entice enough buyers.  This raises rates.
  3. Jobless claims were also nearly dead on with expectations coming in at 372k versus expectations of 370k.
  4. Extension risk: as rates move up, borrowers in 5.5 and 5.0% rate ranges are much less likely to pay off their loans, decreasing liquidity and return for investors.  So traders dump 5.0 and 5.5 coupons for what they believe will be a more "en vogue" 6.0-6.5% coupon in the coming months.  This phenomenon compounds the primary stimulus for the sell off.  Long story short, it's the salt in the wounds, the "momentum effect" if you will.

At any rate (pun intended), run and hide today.  It appears that bond traders feel that the absence of good enough news is bad news.  Yet equities traders are not seeing eye to eye as the Dow has failed to get off the ground.  Chalk up yet another morning where money has flowed OUT of BOTH stocks and bonds on the same day.  Can you say stagflation?

If you didn't lock on yesterday's alert, today again, is a floater until further notice.  If your outlook is mid term, or long term, floating makes sense provided you agree that the economy will continue to languish.  If your outlook is short term, you really have to consider whether or not the deal is still executable if rates rise any more.  We are *probably* poised for a bit of rebound some time in the next three days.  This assertion sheerly from a technical read of the data's mini-cyclical pattern.

MBS are tracking fairly well with treasury, so feel free to take cues from the 5 or 10 year note, but as always, check back here for the final word if you are about to make a decision based on treasury data.  Good day and good luck (we'll need it).