MBS MID-DAY: Worst Levels in 3 Weeks as Debt Deal Takes Shape

MBS Pricing Snapshot

To be completely fair to the 'weakness' referenced in the headline, it arrived entirely in the space of an hour during the middle of yesterday's session. As bond markets were closed, it gets the 'overnight' designation despite occurring in the middle of the day.

The news in question was word of a potential Senate deal that would fund the government through February. Treasury futures were the only real indication of a potential bond market reaction. They fell just below the weakest levels from October 10th, when 10yr yields had risen just above 2.72.

It was no surprise then, to see 10yr yields begin the overnight session trading in a range from 2.71-2.74. They held this range in fairly stable fashion right through to the domestic open. MBS began the day roughly a quarter of a point weaker from Friday's latest levels.

The morning's only significant data was mildly positive for bond markets, with the New York Fed's Empire State Manufacturing survey coming in its weakest levels since May.

Before and beyond that, tradeflows themselves have been erring on the side of positivity and resilience since hitting 2.74 overnight. Both stocks and Treasury yields failed to make new highs at 5:30am, and the sense is building that we're simply in the midst of a technically motivated bounce back from weaker levels.

In other words, with or without this morning's data, the weaker levels seen overnight are potentially being seized as a near term buying opportunity for bond markets. It remains to be seen how well they would be defended if a debt deal becomes more of a reality early this week.

For now, 10yr yields are back down to 2.698 and Fannie 3.5s are only 2 ticks lower on the day at 101-02--well off the morning's lows at 100-28.

- Empire State Index 1.52 vs 7.0 forecast, 6.29 previously
- Employment Index 3.61 vs 7.53 previously
- New Orders 7.75 vs 2.35 previously
- Headline index lowest since May
- Market Reaction: small positive reaction, but tough to separate from Monday morning ramping-up of activity.

The October 2013 Empire State Manufacturing Survey indicates that business conditions held steady for New York manufacturers. The general business conditions index fell 5 points to 1.5. The new orders index rose five points to 7.8 and the shipments index fell three points to 13.1, suggesting that both orders and shipments increased modestly over the month. The prices paid index was unchanged at 21.7 and the prices received index fell six points to 2.4. Labor market conditions were also steady, with the index for number of employees falling four points to 3.6 and the average workweek index inching up to 3.6. Indexes for the six-month outlook continued to convey a strong degree of optimism about future business conditions.