MBS Day Ahead: Bond Markets Getting Back to Business, Just in Time for Bigger Data

The past two weeks have been the best and worst of times when it comes to bond markets and mortgage rates.  While it is always nice to go on a run to periodic lows, it will probably always be frustrating to see them evaporate so quickly.  On a daily basis during the latter half of the month, I was keen to point out that Thanksgiving weeks often prove to be the most volatile of the month but that the following week tends to push back in the opposite direction.  So if volatility had taken rates higher, we could have held out hope that the first week of December would take them back lower, and vice versa.

As it happened, the volatility clearly took rates lower during Thanksgiving week, and although it was a gradual process beginning yesterday, the first week of December has clearly taken rates higher.  The silver lining to yesterday's weakness is that it was enough to get rates right up to the edge of the previous trend.  That means we're entering that magical territory where the traditional Thanksgiving week volatility has been washed out and we can now get on with the year-end trend formation.  The not so silver lining is that the magical territory only begins at current levels, but stretches up another 10bps in terms of 10yr Treasury yields.

The extent to which we explore that territory today will likely have at least something to do with the data.  It's more meaningful today with ADP Employment bright and early followed by the just-as-important ISM Non-Manufacturing PMI.  The other major consideration is the ongoing risk of corporate debt issuance.  There's not really anything to be done or concluded about it other than to say that deals will continue to be brought to market and that they will continue to cause volatility for Treasuries, which ultimately filters through to MBS.  Hopefully Monday and Tuesday were big enough that we get some reprieve on that front today.