MBS Day Ahead: A Whole Different Kind of Reprice

Given our focus on trends in mortgage rates, we often discuss lenders' intraday reprices.  At the moment, however, there is an entirely different kind of 'repricing' happening.  Simply put, global economic reality is being repriced.  The jig is apparently up for China's massaged economic stats and the rest of the global macro-economy seems none too pleased. 

This is occurring against the backdrop of an already volatile market for currencies.  The end of Fed QE and the inception of Fed rate hikes has long been feared to send shockwaves through emerging market currencies.  Nouriel Roubini summed this up well:

"rising interest rates in the US and the ensuing likely rise in the value of the dollar could, it is feared, wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households. Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further."

China's move to devalue their currency puts extra pressure on emerging markets, who must similarly devalue their currency in order to compete, thus subjecting themselves to more of the same ill-effects described above.  Long story short, none of what's happening is good for growth.

Whereas something like 2yr yields are close enough to "overnight" money to follow the Fed Funds Rate, 10yr yields and mortgage rates have long enough durations that they can march to their own beat, relatively speaking.  It's here that we've been seeing the repricing of growth expectations play out.  It keeps a special technical formation intact--one that's been intact for three decades now: the chopsticks of death.

(and for those that just want to see the trendlines, here you go):

The point is that the recent ground-holding has kept the 30yr bull market alive in bonds for now.  If 2015 was to be the continuation of 2012's potential long-term bounce, we have yet to see it.

On a more recent timescale, the important trends are the 2015 uptrend and the recent downtrend that began in July.  The latter has broken the former, and yields need to stay inside the new trend through this week in order to confirm. 

Today brings the week's first economic data, but no one is expected to care too much.  Everyone will be more preoccupied with risk markets.  Will equities continue to sell and by how much?  If they don't, how eager are bonds to bounce back to higher yields?  All we can do is watch and react.  We're in uncharted territory here.