MBS MID-DAY: Unexpected Weakness After Japan Tape-Bomb, but Some Redeeming Qualities

By: Matthew Graham

This will largely be a reprint of an update that appeared on MBS Live this morning.  Reason being: that update covered the impact of big, surprising news from the Bank of Japan overnight, and it has been the only salient market mover for bond markets. 

As for the movement, it's not good, but neither is it without its redeeming qualities.  Bonds are decidedly weaker (not good).  But 10yr yields are holding under or around key technical ceilings and MBS are outperforming somewhat heroically (redeeming).

And now for the big, long explanation on the overnight news:

Big, Long Explanation on Japan and Thoughts About What it Means

Reuters could tell you way more about what happened in Japan overnight, but the gist is that the Bank of Japan (BOJ) unexpectedly ramped up their already aggressive stimulus efforts.  They'll now be buying 80 trillion yen per year--a shockingly big increase from the previous 50 trillion.  At today's exchange rates (which have seen a dramatic spike in dollar/yen), that's just over $720 billion--quite a lot for an economy the size of Japan's.  It would be like the Fed saying they would be buying over $2 Trillion a year, or "more than twice as much" as they actually bought.

And even in nominal terms, $720 billion is still a lot of money--enough to have a material impact on trading levels around the globe.  This is made all the more certain by the fact that the BOJ buys FOREIGN bonds, among other things.  We know they buy plenty of Treasuries, and we know their buying is limited to the lowest-risk countries.  With German 10yr debt paying under 1% and other strong European countries in similarly low-yielding shape, it's easy to like our odds of seeing more of that money.

Even so, the initial reaction to the news was mostly positive for equities markets.  Keep in mind that the implications of Japanese QE are a bit different due to the fact that the BOJ actually buys ETFs and REITS, which both directly benefit stocks.  Beyond that, there's always been a "risk-on" reaction to global easing announcements.  Depending on the country and the details, this has either lifted both stocks and bonds simultaneously, or just lifted stocks while hurting bonds. 

Today's version has been strongly beneficial to stocks, and that's the main story.  Bond markets are caught in the crossfire of 'asset-allocation trading' (sell bonds to buy stocks) and a sharp move weaker in dollar/yen (which correlates with higher yields).

Now for the fun part.  Given the magnitude of the announcement, the all-time highs in stocks, a 5yr high in dollar/yen (high = weaker), and the fact that it's the last day of the month, trading volume is hilariously low.  While that does NOT make the move any less valid, it does suggest that US bond markets are just along for the ride in someone else's theme park.  There are actually several great arguments that can now be made for longer-term investors stepping in to buy Treasuries at current levels.  The low-ish volume suggests they're waiting until month-end housekeeping trades are over, or for a bit more of a pull-back in yields. 

Either way, the moral of the story is this: while there's nominal (yes, I used that word twice in this update...  sorry) weakness today, not only is it not the end of the world, but it's actually a very strong showing considering the other factors.  This doesn't necessarily guarantee a bond rally is chomping at the bit, but importantly, it "doesn't NOT" guarantee that.


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
100-00 : -0-05
FNMA 3.5
103-12 : -0-03
FNMA 4.0
106-05 : -0-01
Treasuries
2 YR
0.4930 : +0.0160
10 YR
2.3370 : +0.0290
30 YR
3.0660 : +0.0180
Pricing as of 10/31/14 12:45PMEST

Morning Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
11:10AM  :  ALERT ISSUED: MBS Pushing Weakest Levels; Negative Reprice Risk Increasing
9:59AM  :  Big, Long Explanation on Japan and Thoughts About What it Means

Live Chat Featured Comments
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Peter Lassig II  :  "MG: It's like I've taken MBS market info heroin and can't quit. I'd let my trial run out and waited to subscribe wondering how I'd do without MBS Live. There's just no substitute to having all this information in one place and carefully culled for relevance to our work. Thanks again for the great work!"
Matthew Graham  :  "
MBS Live Update Issued
Big, Long Explanation on Japan and Thoughts About What it Means"