MBS RECAP: Coasting Out At Highs; Nothing Happened Today

MBS Pricing Snapshot

"POMO" = Permanent Open Market Operations, whereby the Fed conducts its scheduled purchases of Treasuries on a virtually daily basis. In this sense, the Fed is like the head chef at a restaurant that will have a fish special at tonight's dinner service. Primary dealers are like fishmongers bringing their catch to market for the Fed's consideration. The Fed knows about how many fish it will need for dinner service, but will buy slightly more or less depending on the selection.

This can leave some dealers with too much or too little depending on how much and from whom the Fed decides to buy. During and immediately after the buying process (from 10:15am to 11:00am most days) supply and demand fundamentals come into play where excess demand from those left without enough inventory can push prices up (and yields down), whereas excess supply left on the shelves can cause prices to be discounted (pushing yields up).

If it was just one or two fishmongers, sorting out supply/demand micro-imbalances created by the daily POMO would be very simple and cause no volatility. But the fact that there are 21 fishmongers means there is more hustle and bustle to get inventory sorted out before things start getting stinky. In general, it's slightly more common to see yields fall into and during the POMO and rise afterward, but far from guaranteed.

However, if you see a noticeable move into stronger territory during that time, a leveling-off after 11am does become more likely. Volumes have also spiked (relative to excruciatingly low volume overall) during POMO, which is another clue that this is the event being traded. None of this is of any consequence to the bigger picture and only relayed here by way of explaining the move and suggesting it might get harder to sustain the momentum starting now.

Fannie 3.5s are up 10 at 101-06 and 4.0s are up 9 at 104-03. 10yr yields are down just under 4bps on the day at 2.495.