MBS RECAP: "Safe" Rally Following Weaker GDP

MBS Pricing Snapshot

No need to overcomplicate things, MBS are up. Fannie 3.0's pivoted over 104-17 heading into the noon hour. 10yr yields did the same with 1.668 (but "under" vs "over"), and both have since held the improvements. Keep in mind that the first rally of the day arrived before most any rate sheet, so we're only just now holding that 4 tick (.125) gain vs most rate sheet print times that connotes the early possibility of positive reprices.

Stronger-than-expected Consumer Sentiment has not been enough to offset weaker GDP or the prevailing bullish sentiment in bond markets. That sentiment was made apparent even before the GDP report as improvements began right at 8am. There was a good bit of technical resistance to a move lower with yields relentlessly buffeting the thick glass range boundary at 1.674 all morning.

But cracks are starting to show now, and unlike Tuesday, these were achieved via a slow and determined grind lower in yield. Another clue to the resolve is that bond markets are very much marching to the beat of their own drum, looking almost completely oblivious to fluctuations in equities. These are the first real inklings of the "lead off" ahead of next week's big-ticket events that we mentioned as a possibility for this week.

MBS have moved to new highs on the day with Fannie 3.0s up 9 ticks at 104-17. 10's are down to 1.670.

It bears mentioning that 1.670 isn't a far leap from 1.674, and a few caveats might temper the bullishness (or paradoxically suggest more to come). The Fed just wrapped up a daily buying operation in 10's and before that, post-GDP short covering provided an extra bit of "oomph" to the fundamental motivations for the rally. In other words, conditions have been ideal to push yields lower but a sunny Friday afternoon ahead of only 1 more trading session before "month-end" may have concentrated the activity in the morning hours, leaving the afternoon at the whim of whoever sticks around the longest and speaks the loudest. Current spread levels in MBS cause some concern for afternoon leakage but that's not a hard and fast rule.

The main risk we're pointing out is that 10's might not really be at 1.670, but rather at a stretched and distorted version of 1.674. Whether or not this turns out to be the case should become more and more apparent as we move into PM hours.