MBS MID-DAY: Quiet Morning So Far; Corporate Bonds Still in Control

Anyone who's not talking about this week's rate movements in the context of the big Actavis corporate bond offering is missing the point.  It was yesterday's biggest trading motivation and it continues to guide this morning's range trade.  Yesterday was merely the announcement, price talk, and book running.  That means the firms representing Actavis are on the phone taking orders from investors for how much of any given tranche they would want to buy based on the the initial price talk.  The price talk is sort of like guidance.  It's the issuer's way of saying "here's where we think this will ultimately be priced."

From there, the deal moves on to the official launch, where the bookrunners crunch the numbers on the orders they've taken and determine which investors will get which amounts of which tranche at which price.  The final "pricing" (usually very close to the initial price talk) is effectively the end of the process.  Investors are notified of their allocation and they'll have 7 days before they need to pay for it. 

This morning's resilience has been due to the fact that the actual "launch" amount was slightly lower than yesterday's estimates, though at $21 billion, it's still the second biggest on record.  Later this afternoon, when the deal is priced, we could see more volatility in either direction.  Some accounts will still be needing to sell Treasuries to make room for the deal.  But there could also be positive flows from Actavis lifting the hedges they put in place to lock their rate during the pricing process.  The only somewhat depressing news there is that I'm hearing the deal wasn't heavily hedged, meaning there's not some huge amount of implied bond buying in the cards from so-called "rate-lock unwinds."  There will have been some hedging, to be sure, but it won't be clear if the unwinding of those hedges will be enough to outweigh new selling among those accounts making room for their newly acquired debt.

Long story short, we're waiting for that deal to price, and range-trading around unchanged levels in the meantime.