MBS RECAP: Corporate Bond Issuance and Not Much Else

Today's session did a great job sticking to its likely script.  That means that it was exceptionally uneventful in terms of volume and volatility.  The only interesting development had to do with corporate bond issuance.

At the start of the domestic session (officially 8:20am for Treasuries), yields leaped higher.  Treasuries trade all night, but 8:20am marks a major shift in liquidity.  More market participants come online at that time and many of them have been waiting until then to make trades that must be made.  When trading conditions are thin, this can make for a relatively big-looking spike in yields, as it did today.

The culprit was corporate debt, which hurts Treasuries on 2 levels.  First, it provides an alternative investment in the bond market.  Not every investor has the latitude to hold corporate bonds instead of risk-free Treasuries, but those who do may be tempted to sell Treasuries and buy corporates (due to higher yields).  Treasuries also serve as the basis for corporate bond pricing, so the firms that are handling the sale will often sell Treasuries (or make trades with an equivalent effect) in order to "lock the rate."  This is similar in principle to how some mortgage lenders sell MBS to guarantee rate locks.

Bottom line, there was a big amount of issuance today (roughly $15bln).  That factoid is neither here nor there, but for those of you curious why Treasuries underperformed European bonds and MBS, there you go.  The net effect was a 3.3bp increase in 10yr yields.  MBS, meanwhile, were just barely more than an eighth of a point lower in price.