MBS MID-DAY: Bond Markets Rally After ISM Data

MBS Pricing Snapshot

- Non-Manufacturing Index 54.4 vs 57.4 Forecast
- Business Activity 55.1 vs 60.0 Forecast
- Employment Index 52.7 vs 57.0 previously
- Employment Index lowest since May
- Market Reaction: Bond markets rally at first, but holding near levels hit within seconds of the report. No negative bounce back, but no positive follow-through either.

From ISM:

"The majority of the respondents' comments continue to be positive; however, there is an increase in the degree of uncertainty regarding the future business climate and the direction of the economy."

Twelve industries reported increased business activity, and five industries reported decreased activity for the month of September. Comments from respondents include: "The turmoil and uncertainty of the current state of politics and the U.S. involvement overseas continues to drag on the economy" and "Seasonal growth/improved economic environment."

Employment activity in the non-manufacturing sector grew in September for the 14th consecutive month. ISM's Non-Manufacturing Employment Index registered 52.7 percent, which reflects a decrease of 4.3 percentage points when compared to the 57 percent registered in August. Nine industries reported increased employment, and seven industries reported decreased employment. Comments from respondents include: "Right-sizing the workforce" and "Hiring, but unable to fill all open positions."

Fannie 3.5s into positive territory, up 2 tick at 101-27. 10yr yields down to 2.615. More to follow...

Even now, 45 minutes after Jobless Claims, we've still seen less volume in Treasuries than we usually see by 8am on busy days. MBS have been even more plagued by illiquidity, with bid and ask quotes coming across infrequently and farther apart than normal. When we're watching a single line for price indications, this can make for some bumpy movements and we've seen this so far this morning. Most recently 3.5's ratcheted down a quick 3 ticks to 101-20 from 101-23, but they may ratchet back up just as abruptly.

10yr yields fell to 2.625 from 2.635 after the Jobless Claims data, but were unable to make it any lower since then. They're currently back up to 2.63 in very quiet trading.

Before that, the overnight session was similarly uneventful, though not without some movement. Bond markets generally weakened until 5:40am when 10's hit 2.65, and have generally strengthened since then. All told, none of the movement has violated yesterday's highs or lows--not even close. So we continue waiting for inspiration.

- Initial Claims - 308k vs 313k forecast, 307k previously
- Continued Claims 2.925 mln vs 2.810 mln forecast
- Market Reaction: 10yr yields down 1bp and MBS largely unchanged but neither are trading briskly by any means.

In the week ending September 28, the advance figure for seasonally adjusted initial claims was 308,000, an increase of 1,000 from the previous week's revised figure of 307,000. The 4-week moving average was 305,000, a decrease of 3,750 from the previous week's revised average of 308,750.

The advance seasonally adjusted insured unemployment rate was 2.3 percent for the week ending September 21, an increase of 0.1 percentage point from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 21 was 2,925,000, an increase of 104,000 from the preceding week's revised level of 2,821,000. The 4-week moving average was 2,837,250, a decrease of 4,750 from the preceding week's revised average of 2,842,000.