MBS End Day at Session Lows. Treasury Yields Chop Higher

By: Matthew Graham •

Today was not great for MBS.

4.50 MBS coupons lost nearly a point, going out -25/32 at 101-10.  Losses of that magnitude are not common, though you've seen your fair share lately. But when certain factors coincide, the risk of such steep declines grows.  Here's a short run down of factors working against bonds today:

  • Low Volume.  You'll hear this come up again and again as it exagerates price movements, makes them happen more quickly, and in wider ranges
  • Yesterday saw a "decent" auction lead to good gains.  But we weren't sure if the gains were justified by the auction based on the buyer make-up metrics.  Today reminded us why.
  • Today's auction was considered as bad as yesterday's auction was considered good
  • Econ data was taken with a "pass/fail" sort of assessment, so even though Case Shiller and Consumer Confidence were worse than expected, they weren't "worse enough" to prevent the losses. Even though Consumer Confidence was unexpectedly really weak.
  • Before the Auction, pre-auction concessions were the dominant force driving yields higher.

PLAIN AND SIMPLE:  With the low volume drift lower in yield yesterday, we were set up with only one direction to go today.  That reality is compounded by year-end.  Accounts would be reluctant, in our opinion, to get overly aggressive on bidding yields down below the 3.3's (10yr note benchmark), and we were getting close yesterday.  To relate to MBS, not much upside drive past 102-00 in 4.5's...

So we came into the day with some implicit selling pressure, not only from a technical stance, but also from a fundamental stance as a pre-auction concession had to really leg it to get in position.  "Barely passing grades" from econ data gave that concession the greenlight to do just that, so even before the auction, reprices had already been seen and the losses were already getting a bit pungent. 

Then, the auction was just the nail in the coffin--a clear signal to move back to the other end of a recent spectrum.  Seemingly irrational prodding of inflection points. Here's how the whole thing looks as we approach "going out" time at 5pm...

For a sense of the movement in benchmarks, here's a 1 month look at treasuries, also making a move back toward recent highs...

Not very pleasant from a loan pricing standpoint...  As many as 5 different rate sheets at a few lenders today...  And beyond that, the losses took us quite a way back towards recent lows

Today certainly has tomorrow set up for one of two things: either to capitalize on a poor auction and retest mid-month yield highs, or to be soothed by a decent to positive auction into a corrective rally.  Clairvoyant call, right?  Either going up or down!  You heard it here first!

BID WANTED...bargain hunters still parked on the sidelines.