MBS MID-DAY: Tradeflow Considerations Trump Strong GDP

MBS Pricing Snapshot

Fannie 4.0s are back into positive territory, up 2 ticks at 103-02 after having fallen to 102-21 on this morning's GDP data. Treasuries moved up to new 3-month intraday highs of 2.966 briefly and are now back down to 2.911.

While GDP was stronger than expected, a few things have worked in our favor since the data. First, as is always the case with GDP, it speaks to stale data. That doesn't make it irrelevant, but less of a market mover than its household name status suggests.

Then there's the matter of holiday volume and tradeflows. Volume is, of course, lighter than usual into the second half of December, and today is no exception. That means that any positional biases (traders being predisposed to make certain trades regardless of data and events) have a bigger-than-normal effect.

Once Treasuries hit the 2.96's for the second time this morning and held their ground, the trading positions that were betting on a steeper yield curve (2-3yr lower in yield and 10-30yr higher) had an opportunity to continue unwinding (i.e. trading in the other direction--in this case higher 2-3yr yields and lower 10-30yr yields).

This quickly drew out a big block trade at 9:19am in 10yr futures and a 30yr bond block trade at 9:22am. That helped the momentum continue running in a positive direction for MBS, with the lower Treasury yields prompting "short-covering" as well (traders who had been betting on higher rates being forced in to 'cover' those trades as they become less profitable).

All of the above has run its course for now and we're waiting on the next move. Volume is that much lower now vs 9-930am, making tradeflow and positional considerations all the more likely to motivate any movement.

- Final GDP +4.1 vs +3.6 forecast
- Biggest gain since Q4 2011
- Consumer Spending +2.0 vs +1.4 previously
- No major change in Business Inventories
- Market Reaction: MBS and Treasuries only moderately weaker. Fairly resilient so far actually.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 4.1 percent in the third quarter of 2013 (that is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.

The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued on December 5, 2103. In the second estimate, the increase in real GDP was 3.6 percent (see "Revisions" on page 3). With this third estimate for the third quarter, increases in personal consumption expenditures (PCE) and in nonresidential fixed investment were larger than previously estimated.

The increase in real GDP in the third quarter primarily reflected positive contributions from private inventory investment, PCE, nonresidential fixed investment, exports, residential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and accelerations in state and local government spending and in PCE that were partly offset by a deceleration in exports.