MBS RECAP: Early Weakness Moderates; MBS Outperform Despite Losses

Yesterday afternoon's weak momentum (inspired by comments from Fed's Lockhart) carried over into the overnight session.  Additional losses were contained in the Asian market hours with Treasuries then holding fairly steady despite European bond market weakness. 

Perhaps Treasuries were waiting to see how the morning's important data would come out before continuing in the selling trend.  First up was ADP Employment, and while it was weaker than expected, the underlying message was that it wasn't weak enough to stave off selling. 

On the other hand, we could just as easily dismiss ADP and instead chalk the next 105 minutes of movement up to European bond market weakness and tradeflows at the NYSE open (9:30am).  After all, even though Treasuries would go on to lose more ground on the 106th minute, they didn't have nearly as bad a day as German Bunds.  So we shouldn't dismiss the European weakness simply because our data was seemingly the focus of the morning. 

The ISM Services data was a bigger deal than ADP.  It came in much stronger than expected and sent bond yields immediately higher.  But after a brief initial sell-off, that was it.  In fact, it was really the time between ADP and ISM that did the most damage to bonds, not to mention the fact that trading levels drifted back to pre-ISM levels in the afternoon. 

That tells us that there was an innate desire to sell today, as long as the data didn't get in the way.  The way that trading leveled off suggests more of an absence of selling interest past a certain point, and not the presence of buying interest.  In other words, things got bad enough that sellers had sold enough as opposed to things having gotten bad enough that buyers couldn't pass up the opportunity. 

Bottom line: bonds are open to suggestion heading into NFP.  If there's a saving grace, it's that MBS still aren't seeing half the weakness of Treasuries on these days with moderate selling.