MBS RECAP: And Now For Something Completely The Same

Bonds sold off again.  Don't look so surprised. 

Yes, ADP data was weaker than expected, but it didn't matter due to pervasively weaker momentum driven by the ongoing European bond market rout and a perpetually gluttonous buffet of corporate bond issuance.  If all that made sense to you, you probably don't need to read any more.  For those with furrowed brows, we'll dive a bit deeper.

As you're likely aware, core European debt (especially Germany's) has been in the throes of a brutal sell-off since late April.  10yr German Bunds rose 10bps today (which is a huge move in Bunds) from .51 to .61.  To bond optimists, this is nothing more than the first major growing pain associated with the QE process.  US bonds had the same sort of episodes when investors collectively 'freaked out' about the proverbial bottom being in for rates.  This is the biggest factor in play for US rates markets.

The second biggest factor is an ongoing glut of corporate bond issuance.  There were more huge deals today, bringing the total over $20bln for the second day in a row, and easily maintaining 2015's record pace.  As a reminder, corporate issuance hurts mortgage rates indirectly by acting as an alternative investment in some cases (decreases demand, and thus price for MBS/Treasuries).  Corporate issuance also frequently involves selling Treasuries short as a part of the rate-lock process (because corporate rates are based on Treasury yields).

The net effect was another ugly move for 10's, bringing them up to 2.25.  MBS stayed better insulated, as they've tend to do during big sell-offs.  Fannie 3.5s only lost 5 ticks to end at 104-00.  Fannie 3.0s (now much less relevant) were down 7 to 100-23.