MBS RECAP: Flat, Uneventful Day at Weaker Levels; ROLL Coming up Tonight

NOTE: Tonight is "the roll" for Fannie and Freddie 30yr Fixed MBS.  That means that September coupons will be done trading at the end of business today.  Because MBS price indications are based on the most current month's coupons, tomorrow's prices will reflect October coupons.  Every time you move out a month in terms of MBS coupons, prices are lower, all things being equal.  October prices are currently lower than September, so when the books close on September coupons, it will appear as if prices dropped abruptly when, in fact, we're merely switching to watch a new representative of "MBS Prices."  Again, this is only a change in our frame of reference and does not connote any additional weakness in MBS markets.

All of today's losses were in place by the opening bell.  In fact, Treasuries were significantly weaker right out of the gate during Asian trading hours and never really recovered.  There were no significant instances of economic data or headlines to be tied to the movement--simply the ongoing momentum that's been in place during September so far.

Some of that momentum can be assumed to be due to the typical "unseen hand" factors.  These include tradeflow repositioning heading into a new month, and corporate debt hedging (where large firms will sell Treasuries as a part of their hedging process when issuing corporate bonds).  Beyond that, when markets lack direction and guidance, something as simple as a big trade can provide some level of leadership.  Other market participants don't need to know what motivated the trade.  If they can see a big sale of a certain security, it can be enough to motivate more sales of similar securities. 

From a strategy standpoint, we're in the middle of a shorter-term trend toward weaker levels.  It hasn't progressed enough to threaten the longer-term downtrend of 2014, but this is perhaps the closest we've come to being ready for such a thing to happen.  That's not to say it necessarily will happen, but some of the inexplicable weakness likely has to do with market participants acknowledging that potential.  In other words, compared to the last sell-off in early June, more traders are thinking that this could be a longer-term bounce at the lows.