MBS RECAP: A Fitting End to 2013: Relentless Enigmatic Weakness

On many occasions in 2013, I've referred to weakness as "seemingly inexplicable."  This rarely has to do with the weakness defying explanation and more to do with the lack of overt, traditional, easily-understood explanations. 

In other words, there are general rules about how and why rates move and then there are exceptions.  An uncommonly large amount of 2013 fell into the "exception" category. 

This was made all the more confusing by the fact that economic data often DID have the expected effect (strong data, rates higher, and vice versa), but it wasn't for the historically relevant reasons. 

Case in point: inflation data ceased being relevant.  In the past, weak inflation reports tended to help rates, but CPI and PPI quickly became afterthoughts in 2013, joining the ranks of short-term Treasury auctions as something less than 3rd-tier market movers.

Enough about that though... The point is that today is emblematic of all that seemingly inexplicable movement.  Home prices decelerated further in this morning's first data.  Chicago PMI was notably weaker, with a big drop in the employment index, and Consumer Confidence was only marginally improved. 

That doesn't seem like it should add up to the highest 10yr Treasury yield in more than 2 years, but that's exactly what happened by the end of the day.  Volumes weren't high enough to suggest reading much into the movement, but tradeflows simply outweighed the fundamental events. 

MBS haven't suffered quite the same fate as Treasuries due to the fact that spreads have been generally improving since July (meaning that MBS yields are lower relative to Treasury yields).  While this is just one of the many ways to assess relative performance, at the very least, MBS can say they are NOT at their weakest levels in more than 2 years.  In fact Fannie 4.0s were almost a quarter of a point lower several times on the 26th and 27th.