MBS MID-DAY: Worst Losses of the Week After ISM Data

MBS Pricing Snapshot

Yet another piece of October data is out showing stronger than expected economic traction in spite of the government shutdown. While Not on the same magnitude scale as yesterday's Chicago PMI, today's ISM data still managed to beat expectations, coming in at its highest level since April 2011.

Bond markets are weaker on the news with 10yr yields up to 2.596 and Fannie 3.5s down 10 ticks at 102-06. They lost 3-4 ticks on the data.

Reprice risk is slightly elevated for lenders who were already out with rates. Current losses are just on the edge of meaningful. Most lenders would probably give it a few more minutes to hold ground or want to see more losses before repricing, but we can rule it out simply based on the data available now. To whatever extent we want to infer future weakness in MBS based on Treasuries weakening, Treasuries are weakening as I type. 10's just broke 2.604, slightly increasing the risk that MBS will fall enough to more firmly suggest negative reprices.

- PMI at 56.4 vs 55.0 forecast
- Employment Index 53.2 vs 55.4 previously
- PMI index highest since April 2011
- Market Reaction Bond markets weaker

Manufacturing expanded in October as the PMI™ registered 56.4 percent, an increase of 0.2 percentage point when compared to September's reading of 56.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI™ in excess of 42.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the October PMI™ indicates growth for the 53rd consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the fifth consecutive month. Holcomb stated, "The past relationship between the PMI™ and the overall economy indicates that the average PMI™ for January through October (53.3 percent) corresponds to a 3.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI™ for October (56.4 percent) is annualized, it corresponds to a 4.4 percent increase in real GDP annually."

The overnight session began with Treasuries trading flat near yesterday's high yields. Asian hours were a non-event. We've seen some mention of higher PMI in China, but it was close to consensus and from the standpoint of US bond markets, simply not a market mover.

Block trades during European hours have been, however, with the most notable instance at 6:30am resulting in a move from 2.57 to 2.59 by 8:19 am. That coincided with MBS opening 6 ticks lower at 102-10.

Both MBS and Treasuries have been sideways since the open, with the only significant data of the morning arriving at 10am in the form of ISM Manufacturing. 2.59 in 10yr yields was the lower boundary of the sideways range that persisted during the shutdown, so holding lower than that is good for now. It has the chance to act as technical support if ISM data doesn't object.

Given yesterday's highly charged Chicago PMI numbers, there's likely some latent concern that today's ISM could beat consensus. If it doesn't, expect a more sincere move away from this morning's 2.59 yield highs.