MBS RECAP: 2015 Realities Continue to Frustrate Bond Markets

Welcome to the 1st half of 2015.  This is the 6 month period where European interest rates defied even the most bullish expectations after Europe began the QE process.  It resulted in German 10yr Bunds getting very close to 0% in April.  Then the fear took hold.

Lower rates and weaker Euros were the most popular trades during the QE roll-out.  Once market participants feared those trades had run their course, the bounce back was swift.  Bund yields went from .15 to .80 in just over a week.  At the same time, the Fed had just removed the verbiage from their policy announcement that provided calendar clues for a rate hike.  All of the above served as massive motivation for any corporations to issue debt immediately as corporate bond rates are tied to Treasury yields.  By issuing sooner rather than later, they were/are hoping to avoid a continued push to higher rates later in the year.

And issue they have!  Coming off an all-time record month in May, today got June off to a fast start in terms of corporate issuance with over $10bln today alone.  As we've discussed, not all of this issuance amounts to direct competition for Treasuries and MBS, but for some investors, it does.  Additionally, the firms that handle the books for the corporations issuing the debt will often protect the deals from interest rate volatility with hedging activities that cause weakness for Treasuries.  In such cases, MBS don't usually take as big of a hit, and that was true of today's session.   

If there was an overt catalyst for today's run up in rates, it was the ISM Manufacturing data.  While it was only slightly stronger than expected, it arrested a 6 month decline that began with November's ISM data.  Additionally, the components of the report were strong, including the employment component.  Investors pay extra attention to that on NFP week.  From there, the initial sell-off was seized upon as the cue to get in on the selling before corporate issuance took a broader toll.  Thus we find ourselves right back in the recent range.