MBS RECAP: Corporate Bond Market Weighs on Rates, but Narrow Range Prevails

It was a struggle to observe anything interesting in bond markets today.  That environment usually allows 'tradeflow considerations' to rise to the surface as far as market movement is concerned.  That's our catch-all term for trading that's driven by necessity and technicals rather fundamental economic data. 

In other words, there were no reports that out that prompted bond markets to begin giving up ground starting at 9am and to hold their ground in the afternoon.  But there were more than $8bln in new corporate bonds issued.  These create tradeflow motivations for Treasuries/MBS for 2 key reasons.  First, there's the simple fact that they act as an alternative investment for some investors.  Less obvious, but more sinister is the fact that their pricing is typically based on Treasury yields, and as such, that pricing is often "locked" via the selling of Treasuries.  Whenever firms decide to take out these "rate-lock hedges," there is immediate selling pressure in bond markets.

We contended with some of that today, and it left Treasuries slightly weaker.  Fortunately, not all firms hedge in this way, and oftentimes, the hedges are bought back after the deal is launched.  This limited the losses for Treasuries, as did the technical support just over 1.90 (10yr yield).  Beyond that, MBS held their ground a bit better as they're less directly affected by the Treasury-specific tradeflows.  By the end of the day, Fannie 3.0s were only 1 tick weaker from Friday's latest levels.