MBS MID-DAY: Bond Markets Weaker Ahead of Auction, FOMC Minutes
By:
Matthew Graham
•
MBS Live: MBS Morning Market Summary
Part of the explanation for today's movement lies in yesterday's events. Notably, we saw the biggest spike yet in 1-month Treasury Bills. This isn't something that's normally on the radar of MBS markets. It's only marginally on the radar right now and even then, only because of the debt-ceiling drama. The weakness (read: rising yields) in the shortest maturities on the yield curve can frequently result in some measure of strength for longer maturities. It doesn't always happen like this, but it did yesterday.
Paradoxically, higher coupon MBS (effectively shorter maturities because higher rates have more incentive to pay off) outperformed lower coupons. If we're just comparing long and short maturities, that means MBS basically made the opposite move compared to Treasuries. Potential reasons for this include the recently released monthly prepayment statistics which tacitly suggested buying opportunities in higher coupons as well as nervousness about today's FOMC Minutes.
Yesterday's causality notwithstanding, part of today's movement is correction to yesterday. As such, higher coupon MBS are faring worse than lower coupons. That normally happens when shorter duration Treasuries are lagging longer durations, but the opposite is true today. 10's and 30's are in the red while everything 5yrs and under is in positive territory. The 10yr auction at 1pm is likely adding to this dynamic as it's not uncommon for traders "make room" for new debt either by selling Treasuries or simple trading prices lower in order to facilitate a smoother auction process (lower prices, higher yields = more demand). FOMC Minutes follow at 2pm.
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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Morning 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 morning.
9:37AM :
Bond Markets Close to Unchanged after Yellen News; MBS Roll
Last night's news that Fed Vice-Chair Yellen would be nominated to replace outbound Bernanke was almost wholly anticipated. The palpable LACK of a reaction in overnight trading stands as proof.
To be fair, there was indeed a reaction at first. Equities and Treasury futures both shot nominally higher and with pretty decent volume for that time of night. The indignant attitude comes from the fact that the improvement in bond markets amounted to less than 2bps in 10yr yields and was quickly unwound. In other words: quick knee jerk on the headline, and then back to the business doing nothing at all.
Treasuries continued into weaker territory until European markets came online. Weaker data in the UK provided a boost to core European debt. Treasuries willingly followed the rally, but stayed perfectly inside yesterday's trading levels.
The rally reversed in the few hours heading in to the New York session and 10's have been flirting with "unchanged" since 8am. Yawn...
MBS look like they lost a lot of ground based on 2-day charts or outright prices, but are actually 4 ticks (.125) improved at the moment. The optical illusion is due to "the roll." Yesterday's prices were based on October coupons (for Fannie and Freddie 30yr MBS... Other sectors haven't rolled yet). Today's prices are based on November coupons. October coupons are no longer trading, so we now observe November prices. If we could chart Nov prices yesterday, the chart would not look like it changed. In other words, there was no drop in prices. We just changed our focus to a coupon that was already trading about 10 ticks lower.
To be fair, there was indeed a reaction at first. Equities and Treasury futures both shot nominally higher and with pretty decent volume for that time of night. The indignant attitude comes from the fact that the improvement in bond markets amounted to less than 2bps in 10yr yields and was quickly unwound. In other words: quick knee jerk on the headline, and then back to the business doing nothing at all.
Treasuries continued into weaker territory until European markets came online. Weaker data in the UK provided a boost to core European debt. Treasuries willingly followed the rally, but stayed perfectly inside yesterday's trading levels.
The rally reversed in the few hours heading in to the New York session and 10's have been flirting with "unchanged" since 8am. Yawn...
MBS look like they lost a lot of ground based on 2-day charts or outright prices, but are actually 4 ticks (.125) improved at the moment. The optical illusion is due to "the roll." Yesterday's prices were based on October coupons (for Fannie and Freddie 30yr MBS... Other sectors haven't rolled yet). Today's prices are based on November coupons. October coupons are no longer trading, so we now observe November prices. If we could chart Nov prices yesterday, the chart would not look like it changed. In other words, there was no drop in prices. We just changed our focus to a coupon that was already trading about 10 ticks lower.
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.
Matthew Graham : "if 1-month T-bills are under pressure, then Repo market sort of has to be under pressure as far as I understand (which isn't enough to comment on it too intelligently when it comes to the ultra short end of the curve)."
William Packer : "Matt, is the repo market under any pressure right now?"
Matthew Graham : "If money is flowing out of the short end of the curve, sometimes the long end benefits by default. That was probably happening to some extent yesterday, and now it's "un-happening" a bit this morning. That's what I meant by "correction to the flattening move." Hopefully that makes sense."
Matthew Graham : "Debt ceiling drama has taken a toll on the shortest maturities, which is why we noted 1-month Treasury Bills for perhaps the first time ever (because they almost never impact the section of the bond market we're concerned with as MBS watchers)"
Matthew Graham : "For anyone curious: "flattening" = longer and shorter maturities moving closer together in terms of yield. So if 2yr yields are rising and 10's are falling, that's flattening."
Matthew Graham : "there's some measure of correction to yesterday's very determined flattening move (following the 1-mo T-Bill frenzy), as well as a pretty normal concession for 10's and 30's auction in a market that really doesn't have much else to trade."
William Packer : "yep, maybe treasuries are worried about demand?"
Victor Burek : "we do have a 10 year auction later"
William Packer : "at least on this thin volume mbs is holding up vs tsy lol"
Jason Anker : "similar at most large corr currently "
Jason Anker : "what i have seen says they will execute and if the income doesnt match they will sell it back to you"
Ira Selwin : "they may or may not execute the 4506 - unsure yet"
Gaius Rossini : "thanks ira... that means that you can sell it to wells, and then wells themselves will execute the 4506 after the IRS is back in business?"
Ira Selwin : "Re: Wells - 4506-T and Tax Transcripts
Effective on all Loans (delegated and Wells Fargo Prior Approval) with a Note date on or after September 25, 2013, Wells Fargo Funding we will not require Sellers to provide tax transcripts.
A fully executed 4506-T form must be provided for all income-contributing borrowers."
Gaius Rossini : "the concept of pulling tax transcripts after closing but before delivery... are most lenders/investors allowing that? I thought i read somewhere that wells was not allowing that. is that true?"
Matthew Graham : "9 ticks or .28125 bps "
Bob Groya : "what was the net effect (in bps) of the roll? "
James Barnes : "Roll over day...fun"
Matthew Graham : "I mostly agree. I just don't see an increase to the monthly QE amount, though I'd be happy to be wrong about that."
Hugh W. Page : "I think it's pretty clear we'll need much better data to sway her to start removing QE and I think worsening data could prompt additional QE potentially."
Matthew Graham : "Good thinking HP. Here's another contribution to the "past Yellen speeches" effort: http://www.federalreserve.gov/newsevents/speech/yellen20130302a.htm"
Hugh W. Page : "To get some insight into Yellen's psyche here's a speech she gave about a year and a half ago. http://www.federalreserve.gov/newsevents/speech/yellen20120411a.pdf A bit wonky but it appears to be pretty clear under her leadership we'll need a pretty significant pickup in employment, growth,etc before she's on the tapering bandwagon."
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