MBS RECAP: Pain Continues For Bond Markets; Reasons Remain Frustrating

By: Matthew Graham

Who can forget this classic quip when asked why rates are higher: "more sellers than buyers?"  OK, so maybe that's not so classic, depending on your background, but the point is that it's not too far from the thesis for the current turmoil in bond markets.  Granted, if we take the time to devote quite a few more words to the topic, we can talk about how the long term prospects for low US rates have been perpetually dependent on the trajectory of European rates remaining  on it's 2014 path, but who has time for all that?  Do your business partners and clients raise an eyebrow if you tell them rates are moving higher because of Europe?  Is it worth it to explain to them why you're right?

No, not at all.  It's far easier to say "more sellers than buyers."  It has the added benefit of being true.  Just forget the fact that the sellers have emerged almost exclusively because markets are sensing a long term bottom in European bond yields and you're essentially there. 

Of course there are other factors, but they're even more esoteric and frustrating to explain to clients and colleagues (these include tradeflows, corporate bond issuance, and Treasury auction positioning, among other things).  Probably the toughest among those is the notion of tradeflow momentum.  This has come up several times today, and in several ways.  The easiest way to think about it is to consider that many traders either make conscious decisions or are forced into a particular trade when the price of the thing they're about to trade hits a certain level.  You might here those funny old actors talking about their "buy stops or sell stops" on the trading commercials  on CNBC. 

In a client note today, CRT Capital's David Ader said of the Treasury market "when you have the type day versus day volatility this market has been experiencing it's not about sustainable logic and momentum, but panic and positions."

That's basically it.  Rates (or prices of bonds) hit a certain level and it prompts automatic buying or selling.  Let's say it's selling, because there's been a lot of that recently.  Selling lowers the price and creates new triggers for the next traders in line.  They either decide (panic) or are forced (positions) to capitulate to the momentum.  Usually there's enough 'depth' in the market to absorb a good amount of movement, but in the current environment, there is less liquidity.  This puts those trigger levels closer together for multiple traders and thus makes for particularly violent snowball movement. 

On a specific note, bonds were actually in stronger territory day-over-day, but hit new 2015 high yields overnight.  Additionally, mortgage rates ended the day higher due to late weakness not being priced in sufficiently yesterday and early weakness setting a low bar for reprices today.  Looked at another way, today's closing levels were downright awful compared to any other close than yesterday.  We would have liked to have seen a lot more bounce back to consider today a 'win.'


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
100-17 : +0-06
FNMA 3.5
103-28 : +0-05
FNMA 4.0
106-14 : +0-05
Treasuries
2 YR
0.5960 : -0.0240
10 YR
2.2470 : -0.0400
30 YR
3.0100 : -0.0410
Pricing as of 5/12/15 5:16PMEST

Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
1:51PM  :  ALERT ISSUED: Heads-Up: Enough Weakness to Technically Justify Negative Reprices
10:15AM  :  Bond Markets Hovering Near Unchanged Levels After Big Overnight Sell-Off

MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
John Tassios  :  "David: in my opinion, and this just my take only, the fundamentals worldwide to support lower yields is still there. This is a huge unwind of a one way trade following the announcement of ECB QE. Lower Yields argument: still have low inflation, weakness in world growth, sluggish US GDP and econ data, low wage growth, weak aggregate demand worldwide at same time you have huge over supply everything from of raw commodities to finished goods pushing proices down, low money velocity,world govt's with high debt levels, ongoing deleveraging. At same time there is risk for upward yields too- Higher Yields argument: Illiquidity, technical selling, positions unwinding, higher commodity prices, abatement of deflationary forces, higher GDP growth and possible FED rate hikes, higher wage data"
Matthew Graham  :  "I would ask that you spend some time getting caught up on the commentary pieces. That's where I share my outlook first and foremost. You can always browse them here: http://mndne.ws/1u7jULc Naturally, the most recent ones will be the most relevant, but really anything from late April is germane. If you just want the quick and dirty, I would say "this sell-off is the most serious we've faced since the 2014 rally began. Investors are legitimately considering that Europe has bottomed-out long term and that's having an obvious effect on domestic rates. In addition, corporate issuance and previously lopsided tradeflow positioning has added to the snowball effect of the weakness while Fed rate hike expectations wreak havoc on the shape of the yield curve.""
Chris Patrikian  :  "what's your outlook on the recent rate hike ?"
Matthew Graham  :  "right down the middle"
Matthew Graham  :  "B+"
Matthew Graham  :  "RTRS- PRIMARY DEALERS TAKE 35.7 PCT OF U.S. 3-YEAR NOTES SALE, DIRECT 11.6 PCT AND INDIRECT 52.7 PCT"
Matthew Graham  :  "RTRS - U.S. 3-YEAR NOTES BID-TO-COVER RATIO 3.34, NON-COMP BIDS $71.10 MLN"
Matthew Graham  :  "RTRS- U.S. SELLS $24 BLN 3-YEAR NOTES AT HIGH YIELD 1.000 PCT, AWARDS 69.83 PCT OF BIDS AT HIGH"
Matthew Graham  :  "3yr auction coming up. The yield expectation (based on 'when-issued' trading levels) is 1.005. In 7 out of the last 7 auctions, the yield has come in lower than expected. In a sense, markets now 'expect' that to happen to the tune of roughly half a bp. The bid-to-cover has been pretty consistent around 3.3x. Indirect bids have taken more and more of late (thanks Europe) and are now up around 49%. Results at 1:01:30pm"
Matthew Graham  :  "RTRS - SHELBY DRAFT OF BILL PROPOSES PROHIBITING CERTAIN USE OF INCREASES IN GUARANTEE FEES CHARGED BY FANNIE AND FREDDIE TO OFFSET OUTLAYS OR LOST REVENUE"