MBS RECAP: MBS Underperform Treasuries But Hold Modest Gains

Volume was surprisingly high today, relative to our exceptionally low expectations.  Even so, it ranks as one of the lightest days of the year, and we probably won't see a meaningful pick up until next week.

Most of the volume that showed up in MBS came courtesy of sellers cashing in on recently strong performance vs  Treasuries.  In other words, MBS yields have been grinding as close to Treasury yields as they were back in February 2013.  When that relationship gets too tight, it can trigger a move back in the other direction.

Despite the correction in spreads, MBS remained in positive territory all day.  Unfortunately for a few lenders, prices were at their highest right around the time they priced and they were subsequently forced to reprice when prices approached lows around the 1pm hour.

The day's economic data had little visible effect, but the 10am ISM data definitely coincided with some movement.  Surprisingly, Treasuries/MBS improved despite reasonably strong ISM numbers.  This could have almost everything to do with the tradeflow-dominated environment in force during these 2-3 weeks of the year, combined with what are still fairly low volumes.  Additionally, there's the notion discussed in the Day Ahead this morning of additional tapering being pretty well priced in already, and thus strong data shouldn't phase bond markets excessively (unless data comes along that makes it look like tapering could be accelerated).