MBS Day Ahead: Light Calendar Means Markets Might Tell Clearer Story

Bond markets love to "hide behind" seemingly important calendar events that aren't actually that important.  Those events draw in more participation and expectations about how others may be wanting to trade based on certain outcomes.  For instance, if NFP is much weaker than expected, chances are there will be more than a few willing buyers of bonds on Friday morning.

But alas!  It's only Tuesday today and events aren't nearly as heady as the mighty NFP.  In fact, today's events aren't really heady at all.  Construction Spending is the only potential market mover among the scheduled data, and it's more common to see no reaction to that data.

But a lack of data isn't necessarily a bad thing on a day like today.  In fact, it's exactly what we need if we have any hope of getting a feel for bond market sentiment ahead of 3 very significant days ahead.  The absence of data deprives bond markets of those "hide behinds," ostensibly forcing truer, more organic sentiment to the surface. 

At stake through the rest of the week is another technical bounce that may or may not pan out.  In the chart below, the new potential bounce is denoted with the number 1, with a past example of a similar technical bounce NOT panning out (#2) and another example where it did (#3).  In fact, that sort of "cross" (purple line moving above green and/or moving up over the horizontal line will almost always be seen before bigger technical bounces.

The only major hurdle when it comes to getting an unencumbered view of bond markets doing their thing will be that thing that bond markets sometimes do with respect to corporate debt.  2014 issuance surpassed record levels as of yesterday and the rest of the early month promises to continue at a breakneck pace (meaning that a lot of companies are offering corporate bonds in order to lock in low borrowing costs on this year's balance sheets).  

The problem with these deals being brought to market is that the issuers effectively take a short position in Treasuries during the process, which looks like a big bond seller in the room.  It can be days before that position is unwound, and that process is usually far less precipitous than the initial selling.  On top of all that, some bond market investors have the choice between investing in MBS/Treasuries and making room to invest in new corporate bonds with attractive yields.  They frequently make that room by selling Treasuries and, less frequently, MBS.