MBS RECAP: Eye of the Corporate Debt Storm Helps Bonds Recover; Treasuries Trump MBS

With 10yr yields at 1.952, we're certainly not out of the woods yet, but we can at least hold out some hope of exiting the woods.  That wasn't such a given after yesterday's push up to 1.99%.  As details emerged regarding today's corporate bond issuance, we began to see a clearer picture of yesterday's weakness.  (Read more about that in the MID-DAY if you like).

The thesis of corporate bond issuance as far as Treasuries and MBS are concerned is that it puts upward pressure on rates.  But if these deals constituted "new information" to us today, why were they moving markets yesterday? 

The reason is that the firms issuing debt are under no obligation to send us a courtesy heads-up that they're selling bonds in order to hedge a big corporate deal  The selling just appears, and we're left to guess as to its motivation.  Incidentally, I did suggest that corporate bond hedging was likely a factor in yesterday morning's rout, but only the insiders who are privy to the hedging strategy had any idea how big the deal would be and that it would be launched today.

AT&T was joined by several other respectably-sized bond offerings.  It pushed this week's issuance toward the top of the heap for 2015.  And again, the more corporate bond issuance, the more upward pressure on Treasury yields.  As those deals "price" (meaning the final pricing for investors is locked in), the Treasuries that were sold earlier in the process can be bought back.  That accounted for both the afternoon gains in Treasuries as well as the outpeformance vs MBS.