MBS RECAP: Choppy Morning Surrounding Data, Stronger After Auction

If trading days were sporting events, today would be a great game.  There were several score changes, but the home team came out strong after half-time for a decisive victory.

Early in "the game," bond markets struggled slightly with Treasuries heading into weaker territory during the European session.  The first reversal in momentum came after one of several competing headlines about Russian military something-or-other apparently fueled some flight-to-safety demand in Europe with the bond market strength spilling over to US Treasuries.  A general falling-off in equities futures both before and after the Russia headlines only helped the cause.

The next major reversal came after the New Home Sales data, which was much stronger than expected.  Now, of course this is a bit of an eyebrow-raiser because all the recent Housing data has been weak, but keep in mind several things:

• Most of the other housing data is measuring closed sales whereas today's measures contracts. 
• Today's regional breakdown showed the Northeast in similar shape to the Housing Starts data (where it was also a big, weird, positive outlier).  Maybe something's going on out there?  I don't know... Just saying that's 2 times now.  If we look at weather averages, December was historically rougher than January, so it's possible the latter served as some sort of pressure release, simply by being 'less bad,' but that's a big stretch.
• Less of a stretch is the fact that New Home Sales has underperformed all the other housing data over the past 6 years and retraced the smallest proportion of its crash.  In that sense, it has plenty of room to continue closing the gap to its peers and today's 'amazing' strength barely gets it to historically awful levels. 

Whatever the truth turns out to be, markets reacted and bond markets weakened into the 1pm Treasury auction, which was indeed amazing, with no need for sarcastic quotation marks.  After that, the tide turned and bond market strength was in control for the rest of the day, delivering medium-sized improvements for Treasuries and MBS after a morning where it could have either way.