MBS RECAP: Widespread Negative Reprices as Bonds End Month Weaker

Treasuries went out the 'in' door for the month of August, with today's 3pm levels matching the opening levels from August 3rd (1st trading day of the month).  MBS briefly traded near their August 3rd levels, but ended in noticeably weaker shape (MBS have been slowly but steadily underperforming Treasuries since QE3).  By the end of the day, most lenders had repriced at least once.

Data was inconsequential this morning, as was most everything else for bond markets apart from month-end tradeflows.  That was a benefit at first, but a significant detractor by the end of the European session, and then again at the end of the domestic session.  Those were the time frames (11am-noon, and 2-3pm) where we saw the big pushes of selling pressure.

Why selling on month-end, you ask?  After all, isn't month-end a time when bond market participants are having to do extra buying in order to balance portfolios?  First of all, month-end trading activity can be buying or selling, depending on how traders are positioned heading into it.  More importantly, not all accounts are part of the world where month-end is a big deal.  In other words, it's only ever a certain contingent of traders that are compelled to adjust portfolios by the end of the month.  Other traders are more nimble, and they may have been buyers in the morning only to become sellers in the afternoon.  The big rise in oil prices only reinforced that case (because it anchors inflation expectations, and suggests decreased central bank accommodation, in general).