MBS SPECIAL ALERT: Explaining The Surprise Mega Rally
The morning has been intense in terms of the "unseen hand" causing massive market movements. I talk a lot about "tradeflows and technicals" moving markets in the absence of scheduled data or major headlines, and today was an otherworldly example of just that. This was written up in quite a bit more detail on the MBS Live dashboard, but the update didn't make the cut-off time to be included in the regularly scheduled Mid-Day recap. Normally, that would mean you'd have to wait for the RECAP at the end of the day, but we're including it early today as it seems like the move in MBS needs some explanation. Enjoy:
MBS LIVE UPDATE 10:42AM
Global Currency Implosion Slings MBS Through The Roof. Positive Reprices Galore
For a day that looked as if it was merely "to be endured" for weary bond markets ahead of NFP, it's turned out to be the most significant rally of the week, nearly matching May 29th's barn-burner. To make matters more interesting, there is no singular event to "blame" for the positivity (and as far as we've seen/heard it's increasingly likely to end up being chalked up to team effort of factors)
Here's a list of some of the potential factors with brief discussion to follow:
- Dollar/Yen reached a critical support zone in the 98.8 zone, and has been trading in the same sort of 'stair-step" pattern all year without meaningfully "stepping back down." 98.8 was the line of demarcation suggesting the first such step down could be in process. Once that technical zone was breached, USD/JPY launched into it's biggest one-day move in several months.
- Eurodollars followed the move (both currencies strengthening vs the dollar). Euros had their own reasons for strengthening (Draghi press conference further supports the notion that the EU won't print money. Euro likes...) but those same reasons suggest tough roads ahead with deleveraging and economic weakness.
- This putting together of 2 and 2, was a slow realization for market watchers as big trades started to pepper the US Treasury complex, which was already in "buy first, ask questions later" snowball mode.
- The snowball got a major push from 2.06/2.07 being broken in 10yr yields, a significant entry point to an even more significant technical zone stretching down to 2.04, and ultimately 2.0, even. The latter was effectively 'tested' today as 10's hit 1.999 for a second or two, but 2.04 looks to be the modal floor. Technicians will take note of yield levels at 3pm to assess longer term trend changes, but would ultimately need tomorrow's action to confirm them anyway.
- MBS Joined in the snowball!!! We've been talking incessantly about the disturbingly wider spreads in MBS and how the cart can lead the horse when MBS are weak enough (convexity selling in MBS dragging down prices in Treasuries), and now the REVERSE is happening today. We've discussed 2.10% in 10yr yields as one line in the sand, below which MBS have tended to look more optimistic. So the good times were already rolling for mortgage markets even before the bigger swing heading into the noon hour.
- Once the bigger swing hit, "more of a good thing" for MBS turned out to be just that, and the rally kept pace astonishingly well (in fact, this is one of the only instances where you'll see little old mortgage markets outperform a global risk reversal snowball's effect on Treasuries. Mark your journals!
- Speaking of global risk reversal snowballs... Yeah... that. It's not fun or glamorous, nor does it make for sexy media headlines the way a big piece of data does, but these snowballs can do this. The longer they continue without great explanations, the bigger they can get, further confounding attempts to explain them. To this end, the words in this morning's opening update, (published 2 hours before the crazy swings) are now unbelievably relevant:
"There's no remaining significant economic data today, leaving tradeflows (jockeying for position and BASING TRADING DECISIONS OFF THE OBSERVATION OF OTHER TRADES) and technicals (TRADING BASED PURELY ON TRADING LEVELS, WITHOUT REGARD FOR ANY FUNDAMENTAL DATA) to guide the price action for the rest of the day."
Sometimes the clearly delineated scapegoat for these kinds of moves just doesn't exist. I know that's a tremendously unsatisfying answer in what seems like a world of mathematical decisions and correlations, but it happens. Think of it like a murder case with overwhelming circumstantial evidence yet no murder weapon. Most of the circumstantial evidence is listed above, but the case isn't closed until tomorrow's witness is called to the stand at 8:30am (meaning that NFP could either confirm everything that just happened, or reinforce the 2.04-2.07 pivot zone in 10's. Looks like we'll be up in the air until then, but not without tons and tons of positive reprices to consider beforehand).
(PLEASE NOTE: the pricing snapshot below is woefully outdated as it's automatically generated between 11:00 and 11:10am each day. On days like today, when insane market spikes happen around the 11:30am time frame during which I normally collate and publish this commentary, it's delayed due to the activity on the MBS Live dashboard. The delay isn't mean to entice you toward our paid service--strictly an issue of our resources being fully allocated to MBS Live when days like today happen. If the timeliness of the prices and analysis are super important to you, it probably makes sense to check out the paid service anyway).
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| Pricing as of 11:04 AM EST | ||||||||||||||
• 30-year fixed-rate mortgage (FRM) averaged 3.91 percent with an average 0.7 point for the week ending June 6, 2013, up from last week when it averaged 3.81 percent. Last year at this time, the 30-year FRM averaged 3.67 percent.
This resul Several Draghi comments put pressure on Treasuries and MBS, but the most notable were those that spoke to the ECB's "ample discussion" of non-standard measures, despite a "rich discussion on incoming data." Draghi drove the implied point home later in the conference, saying the ECB is more conservative than other central banks, and ultimately drove it home even more soundly with the following wire:
RTRS- DRAGHI - VASTLY PREVAILING CONSENSUS TODAY WAS THAT CHANGED WERE NOT SUFFICIENTLY ONE-DIRECTIONAL TO WARRANT ACTION
By that time however, the bulk of the selling was already behind us. Treasury futures volumes peaked around 8:50 after the initial market-moving comments. Fannie 3.0s hit lows of 100-02 and are back up to 100-06. Fannie 3.5s hit 102-30 and are back up to 103-01. 10's are moving lower in yield at the 9:30am equities open and just broke back below 2.096 and S&Ps are opening a few ticks lower after another exceptionally flat overnight session.
There's no remaining significant economic data today, leaving tradeflows (jockeying for position and basing trading decisions off the observation of other trades) and technicals (trading based purely on trading levels, without regard for any fundamental data) to guide the price action for the rest of the day.
As noted in this morning's 'Day Ahead,," equities and Treasuries have been relatively well-connected this week, potentially offering another source of guidance for bond markets (in fact, to that end, stocks have bounced higher in the time it's taken to type the last few sentences and 10yr yields are following the move, back up over 2.10).
From a strategic sense, the less we gain before rate sheets are out, the better, as it would make for a more unified reprice risk landscape.
- Minimal revision to last week (354k to 357k)
- Continued Claims 2.952m vs 2.975m forecast
- Market Reaction: slightly choppy, but Draghi press conference is going on at the same time. No directional moves for MBS or Treasuries yet.
In the week ending May 25, the advance figure for seasonally adjusted initial claims was 354,000, an increase of 10,000 from the previous week's revised figure of 344,000. The 4-week moving average was 347,250, an increase of 6,750 from the previous week's revised average of 340,500. The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending May 18, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending May 18 was 2,986,000, an increase of 63,000 from the preceding week's revised level of 2,923,000. The 4-week moving average was 2,986,500, a decrease of 11,500 from the preceding week's revised average of 2,998,000.