MBS RECAP: Deceptive Data and Strong Auction Lift Bond Prices

By: Matthew Graham

Today's market activity is a tale of two events: the morning's Durable Goods data and the afternoon's 5yr Treasury auction. 

Heading into the 8:30am Durable Goods release, bond markets were slightly weaker.  This is a report that doesn't always result in a market reaction, but certainly reserves that right in the case of bigger deviations from forecasts.  In this case, the +2.2 headline seemed like a big enough 'beat' versus the +1.0 forecast  to justify some concern on the part of bond markets.

Yet MBS and Treasuries both moved quickly into positive territory.  What's up with that?

In short, the internals.  Here's how we described it in the update issued to MBS Live subscribers this morning:

As with so many economic data releases, today's Durable Goods report has a "headline" and "internal components."  The headline is simple enough; just "durable goods orders."  The components are essentially the building blocks for the headline, or some combination of those building blocks meant to filter out some level of volatility in the data. 

For instance, if we know that a large portion of the headline is accounted for by aircraft manufacturing, and defense spending, and if we know that these two components can vary greatly from month to month, we may well be interested to know how Durable Orders fared without contributions from those two components.

Indeed this is one of the most closely watched internal readings in the report--the "Nondefense Ex-Air."  Simply put, it's Durable Goods minus aircraft manufacturing and defense spending.  It's interesting today because it fell by 1.3 percent compared to a forecast gain of 0.7 percent.  It was also revised down to +0.8 in January from +1.5 previously.

For the most even-keeled component of the report to miss by that much AND to be revised so much lower is a more meaningful consideration for markets than the headline Durable Goods reading of +2.2.  As such, markets are able to overlook the stronger-than-expected headline and Treasuries/MBS are permitted a moderately-sized morning rally.

The good times kept rolling with little volatility right up to the 1pm 5yr Note auction.  It ended up being stellar, with much higher demand and lower yield than expected.  Bond markets improved further after that, taking production MBS coupons (the stuff that matters to rate sheets) into +.25-.375 territory day-over-day. 

Even now as we head into the last hour of the day, Treasuries and MBS got another boost and stocks another hit from news that the Fed rejected 5 banks' capital plans after the latest round of stress tests.  The rally hasn't resulted in any new highs for MBS, but it's helping to maintain what we've already seen.


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
96-22 : +0-14
FNMA 3.5
100-26 : +0-13
FNMA 4.0
104-05 : +0-11
Treasuries
2 YR
0.4418 : +0.0128
10 YR
2.6919 : -0.0431
30 YR
3.5431 : -0.0359
Pricing as of 3/26/14 4:07PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
1:09PM  :  Bond Markets Stronger After A+ Auction
12:58PM  :  5yr Auction Preview
8:49AM  :  Bond Markets Back into Positive Territory After Durable Goods Paradox

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Nathan Miller  :  "is it just our internal overlay or will chase not let anyone put a conf jumbo loan under their non-agency?"
Sung Kim  :  "they only allow that on ARMs nathan"
Brandon Blue  :  "Any jumbo lenders out there that will lend to someone that had a short sale 13 months ago? Figured it was worth a shot....."
Jack Stinson  :  "I do not I would try a local bank and broker it to them."
Matthew Graham  :  "RTRS - U.S. SELLS $35 BLN 5-YEAR NOTES AT HIGH YIELD 1.715 PCT, AWARDS 89.46 PCT OF BIDS AT HIGH"
Matthew Graham  :  "RTRS - U.S. 5-YEAR NOTES BID-TO-COVER RATIO 2.99, NON-COMP BIDS $70.80 MLN"
Victor Burek  :  "nice"
Matthew Graham  :  "A to A+"
Victor Burek  :  "Santelli gave it a A+"
Joseph Daquino  :  "I don't know about you guys, but I am starting to see a steady amount of clients doing cash out refinances to pay off debt. People that just refinanced in 2012 & 2013. Guess that historically low rate means nothing when you are drowning in CC and student loan debt."