MBS Day Ahead: Bond Markets Still Sideways Overall; MBS looking Shaky

Until something new and different happens today to inspire some volatility in bond markets, yesterday continues to be the most interesting event.  There are a few reasons for this, not the least of which being the surprisingly real reaction to headlines concerning the drafting of a Fannie/Freddie wind-down bill in the Senate. 

(Read More: Bipartisan Housing Reform Bill said ready for Senate)

The announcement of the Senate bill was interesting because it coincided with an awful lot of MBS-specific movement for a thing that probably won't come to fruition in its current form--if at all.  But then the question becomes 'if this bill probably won't become law, or will be significantly changed before it does, why is it a market mover today?' 

The obvious answer was that perhaps mortgages were drastically underperforming Treasuries for other reasons.  But even with yesterday being the roll (last day to trade March Fannie/Freddie 30yr fixed MBS coupons), and even though mortgages clearly were underperforming Treasuries for other reasons, they were also underperforming even more during the headlines. 

The following chart shows the relationship between prices of Fannie 4.0s and Ginnie 4.0s.  If the headlines are moving markets, we'd expect Fannie to suffer relative to Ginnie (because the headlines concern Fannie, not Ginnie), and that's exactly what we see.

We often focus on Treasury charts because MBS are often moving closely-enough in sync with Treasuries that it's easier to examine the better-behaved security (Treasuries have more volume, more liquidity, trade after hours, trade significantly more in other countries, have a highly liquid futures market, trade in yield on the cash market, eliminating the apparent volatility caused by things like the roll in MBS, and much more).  Yesterday, however, is one of the times it makes sense to break from that habit and look specifically at MBS.  We'll continue to do so until things settle down as far as their relative performance vs Treasuries.

There isn't much on the calendar today apart from the afternoon's 10yr Treasury Note auction at 1pm.  Most auctions haven't resulted in significant market movement recently, but today's 10yr variety is much more capable of that than yesterday's 3yr.