MBS RECAP: Unraveling the Complex Mysteries Behind Today's Market Movement

By: Matthew Graham

Bond markets sold off today because they rallied so hard earlier this week.  That is all*.

I mean, we could sit here and attempt to assign significance to every little market-moving possibility as if it mattered, but as far as today is concerned, that's more than the movement deserves.  That seemingly oversimplified cop-out sentence at the top is what's really going on.

On big selling days like this, it's always good perspective to step back and look at the long term trend.  If we find ourselves in the midst of an aggressive rally, days like today mean so much less than they otherwise would--ESPECIALLY if they follow days like yesterday where a wholly unexpected tape bomb fuels a wholly unexpected extension of a flight-to-safety that looked like it had run its course by Wednesday morning.  Incidentally, even without yesterday, the long term trend still provides plenty of reason for periodic pull-backs.

The chart above also points out what are probably the 2 most important inflection points in the upper 1% yield range for 10yr Treasuries.  Given that the longer term move is as aggressive as it is, and that it suddenly found itself at that same 1.70 level that turned away the initial rally into the 1% range back in 2011, AND given that bonds have rallied 13 out the past 15 days (!), it's REALLY not too surprising to see a pull back at technical levels, ESPECIALLY when it coincides with a similar pull-back at a similarly important technical level for stocks on a week with very well-connected stock/bond correlation.

Bottom line, these moves fit just as easily in a continued downtrend.  If this bounce happens to materialize into more weakness next week, we wouldn't know that based on anything we saw this week.

Keep in mind that it's a 3-day weekend for markets with Monday January 19th being a bank holiday (Martin Luther King Jr. Day).

*Yes, I'm aware of the following anecdotal market-movers:

  • CPI and Consumer Sentiment
  • Greek Bailout extension offer
  • Secret not-so-secret meeting with Draghi, Merkel, and Shaeuble in which Draghi outlined ECB QE
  • NY Post's hacked twitter account and the fake tweets that potentially fueled programatic trading based on tweet-reading algorithms
  • Ongoing rebound in Oil (though I'd continue to boycott oil as a root cause)
  • Big bounce in Yen/$ and other various currency market drama stemming from Swiss National Bank aftershocks
  • Several Fed speeches from Williams, Bullard, and Kocherlakota

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
102-17 : -0-25
FNMA 3.5
105-01 : -0-17
FNMA 4.0
106-24 : -0-07
Treasuries
2 YR
0.4880 : +0.0680
10 YR
1.8310 : +0.1030
30 YR
2.4460 : +0.0790
Pricing as of 1/16/15 5:05PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
10:28AM  :  ALERT ISSUED: Negative Reprice Risk Increasing More Rapidly Now
9:38AM  :  ALERT ISSUED: Early Negative Reprice Considerations
9:10AM  :  Bond Markets Pull Back After Franc the Tank Sobers Up

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Matthew Graham  :  "Europe is a different story. German Bund yields at .45 indicate a different sort of problem--one where the ability to force QE through a political system that didn't previously look like it would allow it might actually sooth markets enough to begin thinking about yields finding a bottom."
Matthew Graham  :  "The problem is that global financial markets never much believed that QE would reflate the US, so we were left only with the beneficial side of guaranteed buy-side flows in bond markets."
Matthew Graham  :  "At it's core, QE's intention is to be inflationary--thus bad for rates."
Matthew Graham  :  "If EU bond markets are juiced because people are panicked, and if QE alleviates panic, then QE is bad."
Matthew Graham  :  "The answer to that question is the stuff about "global growth concerns" JH. "
Jason Harris  :  "but if theirs works as good as ours we still have a couple more to go after this one"
Justin Harward  :  "Can you elaborate on this? "ECB QE is not the same sort of unequivocal benefit to bond markets that Fed QE was." - What do you see a ECB QE looking like? Are they still limited to buying short term (2-3 year) bonds?"
Matthew Graham  :  "A couple folks here kept beating their heads against the desk wondering how much worse things would get when the Fed actually began tapering."
Jason Harris  :  "I have thought all along we may lose ground into ecb....selling the news....hope I am wrong"
Matthew Graham  :  "Taper tantrum was a perfect example"
Matthew Graham  :  "In fact, they do that ALL the time if they know what will happen."
Matthew Graham  :  "I can't really elaborate JH. Markets sometimes trade things before they happen."
Matthew Graham  :  "and QE may mark the beginning of a turning point in those simply because it SIGNALS an ability for the ECB to get around those mean old Germans"
Matthew Graham  :  "The other is that the rally is driven by legitimate global growth concerns."
Matthew Graham  :  "but that's only one potential reality"
Matthew Graham  :  "buy rumor"
Matthew Graham  :  "you answered your own question in your question"
Matthew Graham  :  "Here's the thesis: ECB QE is not the same sort of unequivocal benefit to bond markets that Fed QE was."
Justin Harward  :  "Here's where I'm confused on the ECB QE. If the rally has been driving by the assumption that QE is coming, why would it suddenly be bad when it actually happens? (Or what am I missing here)."
Matthew Graham  :  "oh, that simple little topic"
Justin Harward  :  "Here's the thing. ECB will announce their QE on Thursday (most likely). But what I can't find is how ECB QE would affect MBS prices. Would QE be good or bad for MBS?"