MBS Day Ahead: Busy Day for Data; Corporate Debt Headwind Shifting

Today is by the far the busiest day of the week judging by the calendar, and not just the calendar of economic data.  While that's busy enough in it's own right, we also have several Fed speakers on tap including Bernanke.  Finally, the calendar of corporate debt issuance has been even more crowded than normal for the beginning of the year, and the effects have made their way to broader bond markets.

We don't talk about corporate debt too much in relation to MBS because it rarely has enough of an effect to notice.  The exception occurs when the slate of issuance becomes particularly crowded.  This simply means that there is a high dollar volume bonds being issued by companies. 

These don't have to be household names necessarily, although the two biggest offerings on record have been from Apple and Verizon.  It's more common for there to be ebbs and flows in the general climate for corporate debt.  The beginning of a new year can certainly be one of those times and with rates seen moving higher in 2014, combined with some hope for economic growth (depending on who you ask) companies are understandably interested in locking in financing costs as low as possible and as big as possible.

In other words, Treasury yields frequently determine a portion of the rate that companies pay to investors who buy their bonds.  If there's a chance that 10yr yields might not be back in the 2's for quite a long time if they cross definitively into the 3's soon, there's a sense of urgency to get these deals done ASAP.  It's the exact same economic principle as a borrower wanting to refi before rates go up.  The "high 2's" range in 10yr yields is also advantageous because if rates don't go much higher, they're at least not likely to go significantly lower.  Granted, 2012 showed us you never know how low rates could go, but for now, that feels like the lower probability bet.

Top that all off with the possibility that the economy may begin moving under its own power this year (after all, the Fed tapered 10bln and we're still in one piece) and corporate debt issuance makes all kinds of strategic sense (maybe Verizon's gargantuan deal in September exhibited a bit of foresight in this regard, no?).

Motivations aside, the important part is that there's a lot of corporate debt being issued right now.  Yesterday alone had over $16 bln in new issuance, and the three day total is more than double that already.  MBS, by comparison, will be explosively active if they can muster $7-9 bln in new issuance this week.

Corporate debt doesn't necessarily affect MBS because it's a supplementary investment pulling investors' attention away.  While that can be a small factor, it's negligible in and of itself.  More important is how the corporate debt interfaces with the rest of the bond market. 

To oversimplify, there's a portion of time in the corporate bond's life-cycle between announcement and pricing where it's exposed to interest rate risk from regular old market fluctuations.  The company can effectively "lock" its rate on any given day simply by selling Treasuries (there are various products that accomplish this without the firm actually needing to have Treasuries on hand to sell). 

Once the bond is issued, this process is unwound, and whatever incremental pressure it put on Treasuries (and by extension, MBS), will now be alleviated.  This is  very likely part of the reason bond markets rallied for no other apparent reason yesterday afternoon.

All this talk about corporate debt simply sets the stage to understand that we may have been operating with a bit of extra pressure on bond markets while this massive volume of deals was floating and as they are booked, we may have an equal amount of support.  It won't be much compared to, say, the effect of crappy economic data, but at least it's heading in the right direction now.

As far as economic data is concerned, Jobless Claims is slowly slinking back into a less volatile pattern, so it may have a bit more of an impact than it has recently (so that would be from "none" to "a small amount").  The Consumer Price Index at the same time is hard to get excited about.   The inflation data is something I'd rather blatantly dismiss until it blatantly matters, and we're just not there yet (in the sense that we have yet to see a big market movement clearly correlated to a surprise in an inflation report).

The biggest data of the day is at 10am with the Philly Fed Index.  Bernanke speaks just over an hour after that, rounding out a busy morning.  If we're going to see something other than "sideways range-holding" this week, that's when it's most likely to become apparent.