MBS RECAP: Bonds Pull Back After China Changes Its Mind

By: Matthew Graham •

Let's keep it simple tonight, because it really is pretty simple.  It's all about China still--perhaps with an assist from a weak 10yr auction.

Chinese currency valuations are state-controlled.  The Peoples Bank of China (PBOC) set the exchange rate every day, and limits the amount that it can move.  There isn't some published website that announces this policy.  There are simple state-controlled banks that will do as they're told by the PBOC if the PBOC wants something else to be happening. 

Yesterday's news was that the PBOC was going to free the nation's currency (yuan, or if you're pretentious, renminbi) to move where it will, based on market forces.  They assumed (correctly) that the currency would weaken, and this is what they wanted.  At the same time, it satisfied critics of the longstanding policy of manipulation and interference.  Win/win, right?

As it turns out, there is too much of a good thing for China.  As today's slide surpassed yesterday's, traders noted that state-owned banks began aggressively selling US dollars vs Chinese Yuan.  This is the PBOC's way of saying 'that's enough selling for today.'  And who even knows what they'll do tomorrow. 

Whatever the case, bond markets had been benefiting from the panic caused by the Yuan death spiral.  So if the PBOC is going to step in and stop the Yuan death spiral, bonds are going to stop benefiting, and they did!  Right after the Yuan bounced, so did Treasuries (in overnight trading).  Much of the pull back had already occurred by the domestic session.  A strong bounce in stocks and a weak 10yr Treasury auction helped fuel a more substantial pull back in the afternoon.

All told, bonds went out right around unchanged on the day.  That's not too bad considering the pace and scope of yesterday's rally.  The way we got back to 'unchanged' makes for a bit more anxiety.  If China steps in to keep the Yuan's descent nice and orderly, it won't be nearly as beneficial for Treasuries and MBS as it looked to be yesterday. 

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 : -0-03
FNMA 3.5
103-23 : -0-01
FNMA 4.0
106-09 : +0-00
Treasuries
2 YR
0.6690 : -0.0080
10 YR
2.1480 : +0.0050
30 YR
2.8380 : +0.0280
Pricing as of 8/12/15 7:15PMEST
Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
3:36PM  :  ALERT ISSUED: Additional Negative Reprice Risk
1:05PM  :  ALERT ISSUED: Negative Reprice Risk Increasing After Rotten 10yr Auction
10:25AM  :  Positive Shift After JOLTS; Good Lines in Sand for MBS
10:00AM  :  We Now Join The Correction Already In Progress
MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Sung Kim  :  "in my opinion, this move is all stock market recovery - stupid equity investors"
Caroline Roy  :  "http://mndne.ws/1yYOEPs"
Caroline Roy  :  "no. delayed financing exception. Must source the funds from their own accounts"
Ted Rood  :  "Delayed financing guidelines"
Gus Floropoulos  :  "LTV based on PP"
John Rodgers  :  "Question - if a borrower pays cash for a home and one month later wants his cash back out, are there any special considerations? "
Matthew Graham  :  ""D""
Matthew Graham  :  "RTRS- U.S. 10-YEAR NOTES BID-TO-COVER RATIO 2.40, NON-COMP BIDS $35.03 MLN"
Matthew Graham  :  "RTRS- U.S. SELLS $24 BLN 10-YEAR NOTES AT HIGH YIELD 2.115 PCT, AWARDS 38.64 PCT OF BIDS AT HIGH"
Matthew Graham  :  "10yr auction coming up. High yield is currently expected to be 2.101 with 6 out of the last 6 auctions coming in lower than expected by an average of about 0.4bps (0.004%). Bid to cover has been in the 2.6-2.75 range. Indirect award has been close to 60%."