MBS RECAP: Impressive Correction Following Home Sales Data
By:
Matthew Graham
•
MBS Live: MBS Afternoon Market Summary
Weaker-than-expected New Home Sales data threw bond markets for a loop today. There was essentially no data on tap this whole week, with the exception of FOMC Minutes and Jobless Claims. After being severely trodden upon last week, we looked to Wednesday's Minutes for salvation or damnation. We got the latter, but it could have been worse. Equivocal Jobless Claims on Thursday helped bond markets continue to regroup, but in a decidedly sideways trend overall.
Today, then, was most likely to end up a sideways drift into the weekend, because New Home Sales wasn't supposed to miss by a staggering 96k (394k vs 490k forecast). For reason enumerated in detail in the update below, bond markets bolted toward better territory and never looked back. Actually, this process was 100% accomplished for Treasuries in the first hour of the day while MBS drifted into better and better territory as the day progressed. Unfortunately, it doesn't say much about next week, but it keeps the hope for a pre-NFP consolidation alive.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
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Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts and updates issued via email and text alert to MBS Live subscribers this afternoon.
2:10PM :
MBS Push The Pace; New Highs; Lots of Positive Reprices
"Short Covering/Profit-Taking" in Bond Markets: Traders with outstanding positions (aka "bets that rates will move higher or lower") have "stops" in place (aka "levels at which they'll automatically exit their positions--selling when prices fall after a rally or buying when prices rise after a sell-off").
Even as 10yr yields hovered around 2.90 yesterday, there were (and still are) shorts in the market (those betting on lower prices and higher rates). When something like today's New Home Sales report shakes things up and gets prices heading quickly higher, these short positions may decide (or may be automatically set) to buy at a certain level, thus protecting the gains from the bet they may have made when rates were 10-40 bps lower, or to protect against further losses if they took out a short position yesterday).
When shorts are covering/buying it can further add to the rally that they're attempting to avoid. Thus the remaining shorts are that much harder-pressed to cover, and snowball buying is born. This can be made even more acute if there's a lack of supply for interested buyers (remember, those covering shorts are exiting/covering positions by BUYING). Well guess what... There hasn't been an awful lot of supply in MBS recently for reasons you're already painfully familiar with.
The net effect is simply longer legs and a faster running speed for a rally that would probably not be quite so fast or big. Sometimes snowballs roll in our favor. Today is one of those days, but keep in mind that it looks more impressive than it otherwise might, if not for massive amounts of short-covering on a day with seasonally low participation.
The fact that 10yr yields fell PERFECTLY back to Wednesday's pre-FOMC levels is the biggest clue that we've just seen a rapid flushing out of short bets. There's more liquidity in Treasuries than MBS, and illiquidity exacerbates the effects of short-covering. Hence, MBS are pushing new highs while TSYs drift sideways, having more efficiently covered their shorts and moved on with life and the weekend. This could eventually happen for MBS this afternoon, so don't rule out a late pull-back just because the rest of the day has been so stellar. More importantly don't assume that today equates to a thematic shift, or bounce off recent rate highs. That CAN happen, but it will take similarly lackluster data next week, and even then would only be a consolidative move before Sep 6's NFP casts a firmer vote.
***(Here's a periodic "did you know?" about MBS Live alerts and updates: the red-lettered "ALERT" text almost always connotes negative reprice risk. But it's occasionally used for positive news when it's big enough or having a big effect on trading levels like today's New Home Sales data did.)***
Even as 10yr yields hovered around 2.90 yesterday, there were (and still are) shorts in the market (those betting on lower prices and higher rates). When something like today's New Home Sales report shakes things up and gets prices heading quickly higher, these short positions may decide (or may be automatically set) to buy at a certain level, thus protecting the gains from the bet they may have made when rates were 10-40 bps lower, or to protect against further losses if they took out a short position yesterday).
When shorts are covering/buying it can further add to the rally that they're attempting to avoid. Thus the remaining shorts are that much harder-pressed to cover, and snowball buying is born. This can be made even more acute if there's a lack of supply for interested buyers (remember, those covering shorts are exiting/covering positions by BUYING). Well guess what... There hasn't been an awful lot of supply in MBS recently for reasons you're already painfully familiar with.
The net effect is simply longer legs and a faster running speed for a rally that would probably not be quite so fast or big. Sometimes snowballs roll in our favor. Today is one of those days, but keep in mind that it looks more impressive than it otherwise might, if not for massive amounts of short-covering on a day with seasonally low participation.
The fact that 10yr yields fell PERFECTLY back to Wednesday's pre-FOMC levels is the biggest clue that we've just seen a rapid flushing out of short bets. There's more liquidity in Treasuries than MBS, and illiquidity exacerbates the effects of short-covering. Hence, MBS are pushing new highs while TSYs drift sideways, having more efficiently covered their shorts and moved on with life and the weekend. This could eventually happen for MBS this afternoon, so don't rule out a late pull-back just because the rest of the day has been so stellar. More importantly don't assume that today equates to a thematic shift, or bounce off recent rate highs. That CAN happen, but it will take similarly lackluster data next week, and even then would only be a consolidative move before Sep 6's NFP casts a firmer vote.
***(Here's a periodic "did you know?" about MBS Live alerts and updates: the red-lettered "ALERT" text almost always connotes negative reprice risk. But it's occasionally used for positive news when it's big enough or having a big effect on trading levels like today's New Home Sales data did.)***
Live Chat Featured Comments
A recap of the featured comments from the MBS Live Dashboard's Live Chat feature, utilized by hundreds of industry professionals each day.
Chris Kopec : "But...if the contract is signed, cancelled, and resold, the resold unit is not counted in future reports."
Chris Kopec : "Correct, John....the number does not account for cancellations."
Victor Burek : "New home sales measure the number of newly constructed homes with a committed sale during the month. The level of new home sales indicates housing market trends and, in turn, economic momentum and consumer purchases of furniture and appliances. "
Chris Kopec : "Contract and earnest money delivery, unless I'm mistaken."
John Tassios : "if it's contracts signed, then a % of those wil not close due to the stringent underwriting guidelines"
Chris Kopec : "Newly constructed homes with committed sale during the month."
Andy Pada : "does new home sales reflect closings on newly constructed homes?"
Chris Kopec : ""....The work of Krishnamurthy and Vissing-Jorgensen has influenced the debate at the Fed before, with a previous paper of theirs cited by Fed Chairman Ben S. Bernanke in his speech last year in Jackson Hole that made the case for a third round of bond purchases, known as QE3...""
Troy Evans : "rising supply, rising rates, and rising prices. beautiful!"
Chris Kopec : ""....Supply on a monthly basis is now at 5.2 months vs 4.3 months in June. The number of new homes on the market increased in the month, to an adjusted 171,000 from June's 164,000....""
Troy Evans : "Reuters said new construction supply was up"
Bert Swyers : "i think supply was up"
Troy Evans : "Did you all already hash out the home sales miss from this morning? Is it truly because of rising rates, or still because of lack of supply/inventory?"
Nate Miller : "REPRICE: 11:45 AM - Freedom Mortgage Better"
Edgar : "Bette....not surprised. Especially wholesale lenders. I feel like I (and my clients) have gotten the shaft the last 2-3 months. There were days our lenders (and ones we didn't work with) were .375% higher in rate then many retail/direct lender operations. It's come down a bit but still higher (generally). I had several reps call and question why I didn't have more biz. Really? Jack your rates .375% above the competition and you're really going to make that call?"
Bette Miller : "Lenders not as friendly on the rate sheets as I thought - we're close to where we were Tuesday night - not as good."
Jason Harris : "Dan...I think he was talking about the new mortgagee letter that has something about a second chance with a 1 year wait for people who can tie their hardship directly to an event during the recession...guides looked to be tricky and I think it will take some time for lenders to digest"
Dan Clifton : "a client is telling me he was "reading something yesterday that mentioned the 3 year waiting period no longer applies on FHA." I have not heard this. anyone?"
Jeff Anderson : "That's pretty funny, CK. Didn't Uncle Ben spend years studying on the Great Depression?"
Chris Kopec : "And Krugman talked about it again a couple months ago... http://krugman.blogs.nytimes.com/2013/06/20/a-potentially-tragic-taper/"
Chris Kopec : "Krugman talked about his in 2010. http://www.nytimes.com/2010/01/04/opinion/04krugman.html?_r=0"
Bert Swyers : "we need to hold these gains"
JRS : "REPRICE: 11:22 AM - Suntrust Better"
JRS : "REPRICE: 11:22 AM - Franklin American Better"
Chris Kopec : "AH talked about it below.....basically, Taper talk was premature given the fragility of the economy. Not to beat it to death, but this is what happened in 1937..... economic data was taking an encouraging turn, and then the Fed tightening, and the economy backslid. Look up "the mistake of 1937"."
Jeff Anderson : "REPRICE: 11:20 AM - Chase Better"
Rob Clark : "REPRICE: 11:20 AM - Plaza Better"
Edgar : "My favorite line: “How an exit is communicated to investors matters greatly,” "
Edgar : "I think if the Fed says something similar (in sept) to what Arvind is saying we could have a massive rally in MBS. I could be wrong on this but I feel like MBS has taken a bigger beating than TSY"
Victor Burek : "imo, makes no sense to cut mbs, fed wants to support housing, not deficit spending by keeping treasuries low"
Chris Kopec : "Arvind Krishnamurthy considered pretty influential from what I've read."
Edgar : "http://www.marketwatch.com/story/fed-should-keep-buying-mbs-until-ready-to-end-qe-2013-08-23?link=MW_home_latest_news"
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