MBS RECAP: We've Only Just Begun (to See ECB QE Volatility)

Some time between yesterday's European Central Bank (ECB) announcement and this morning's open, market participants decided to interpret the QE program as buying a fixed amount of bonds of Eurozone countries based on their weighting (aka "capital key") in the ECB.  While the statement does indeed say that purchases will be based on the capital key, it doesn't specify whether that refers to maximum eligible purchases or a flat guarantee to  split the €60bln according to the key.  The latter seems to be the consensus.

That means that Germany, France, and Italy will receive nearly half of the purchases.  This would more than explain the roaring move to new all-time low yields in German Bunds when QE was ostensibly about lifting up the periphery.  But perhaps this is the price Europe must pay for a chance at getting this through the legal spiderweb that threatened to prevent the last bond-buying program. 

To make matters less Fed-like, keep in mind that the ECB won't start buying until March.  Of course if they are going to buy a guaranteed €60bln/mo and of course if that's not going to start right away, then of course there's going to be a massive feeding frenzy on the eligible bonds among institutions that will be able to sell to the ECB in March.  Anyway, a massive land-grab in the European bond market is a no brainer.

That no-brainer dragged Treasuries along for the ride.  Treasuries in turn, dragged MBS.  Both hit their best end-of-week closing levels since May 2013, but Treasuries crushed MBS on a relative basis.   MBS just can't keep up with this sort of pace when the movement is originating overseas.  That's not a bad thing as any more volatility is an unwelcome guest in mortgage markets.