MBS RECAP: Confused, Complicated, but Comforting Trading in Bond Markets

By: Matthew Graham

I haven't seen many days with as many different relevant considerations for bond markets, but if you don't really care about the details, the only important thing to know is that we held steady and even saw solid gains by the end of it.

The complications and confusion began with ECB President Draghi's press conference.  Roughly half the market expects some tangible new action on sovereign debt purchases.  Half of that half was quite sure that wouldn't come until 2015, with everyone else simply not believing that the ECB can pull off actual sovereign debt purchases.  Listening to Draghi this morning, all 3 of these camps had several opportunities to stand up and cheer.  By the end of is though, there was no money printing announced today and tell-tale Italian yields and Eurodollars suggested markets felt a bit defeated on QE prospects.

An ABSENCE of European QE has paradoxically been a neutral-to-good thing for domestic bond markets.  The thinking goes: if the ECB isn't doing QE, things are just going to deteriorate in terms of global growth, thus benefiting the safest-havens like the US and Germany.  We did get some of this type of trading right out of the gate.  It reversed later in the speech, but was exacerbated by completely unrelated tradeflows in the US (owing to new corporate bond issuance, which prompted Treasury sales).

The afternoon saw the other side of corporate bond hedging where companies that had sold Treasuries to lock in their rates, finally priced their deals and were able to buy back the previous hedges.  This gave Treasuries a bit of a boost late in the day and tripped technical levels for algorithmic buying as well as short covering (traders who'd been betting on higher rates subsequently being forced to sell as the market improves enough to threaten their gains).

At the end of the day, MBS had soaked up a good amount of the Treasury-led positivity and ended a quarter point higher.  10yr yields dropped nearly 5bps ahead of tomorrow's NFP.


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
100-29 : +0-10
FNMA 3.5
104-02 : +0-08
FNMA 4.0
106-23 : +0-05
Treasuries
2 YR
0.5400 : -0.0190
10 YR
2.2340 : -0.0477
30 YR
2.9350 : -0.0520
Pricing as of 12/4/14 5:04PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
9:30AM  :  ALERT ISSUED: Sharp Negative Turn for Bonds During Draghi Press Conference

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Matthew Graham  :  "Corp deals will continue to be announced for the next few weeks, and they're still a big wild card. "
Matthew Graham  :  "part of the 9am hour weakness was another big corporate deal, for instance. "
Matthew Graham  :  "no, but they've started to come into play, and offset the new hedges coming in to some extent."
Sung Kim  :  "corp bond issuance hedges being lifted trumps everything else this week?"
Matthew Graham  :  "at 2.26-ish, risks feel more contained than normal for pre-NFP Thursday. If bond markets are willing to hold supportively today following ECB, it makes things a lot less nerve-racking. Sure, you might lose out, but it's at least the sort of scenario where you can entertain either option as opposed to being in a runaway sell-off today where you'd pretty much have to lock."
Justin Harward  :  "I feel like floating. I think NFP is going to be a miss. Would be nice if we could move back to Monday's pricing (.5% better vs today's)"
Tim McNerney  :  "float/lock into tomorrow??"
Timothy Baron  :  "A two or three minute conversation before locking makes a big difference."
Timothy Baron  :  "I try to always have a detailed conversation with clients about locking and what it truly means. When they understand that at their request actual funds are being reserved for them at a certain rate, the "hey, rates dropped" call rarely occurs."
Matt Hodges  :  "simplest way i've dealt with that is explaining that points may not be disclosed, but are assumed - origination at retail is never in black and white until you look at APR."
Caroline Roy  :  "just got this from a customer closing tomorrow at 4%. "Say, Marty ha mentioned that he saw on Internet that interest rates were at 3.75%...? Can you explain that to me?" Happy to have the cobranded materials from the Rate Watch to send to her"
Matthew Graham  :  "Euro certainly responded, but without that "sovereign" word in there, it's not quite as potent. "
Matthew Graham  :  "BFW-ECB SAID TO PREPARE BROAD-BASED QE PACKAGE FOR JANUARY MEETING"