MBS Day Ahead: Bonds Battle Pre-NFP Range but MBS Have It Easier

One of the noticeable themes on the MBS Live dashboard yesterday was that of MBS 'outperformance.'  In other words, MBS were holding steady to slightly improved (after the initial morning weakness) while Treasuries were losing ground ever-so-slightly.  As we discussed yesterday, MBS are always going to be less affected by most bond market stimuli.  That's especially true of "stuff" that has a direct bearing on Treasuries, either due to the structure of the market or Treasuries' role as the global safe-haven.

In terms of market structure, Treasuries form the basis for corporate bond pricing just like MBS form the basis for lenders' rate sheets.  Much like lenders can sell MBS to hedge your rate locks, so too can corporations (or the firms running the books on their debt offerings) sell Treasuries to lock in their borrowing costs.  With corporate debt back en vogue this week, Treasuries have taken a relative hit vs MBS, on top of the hit that both are taking from bond markets--in general--losing ground to stocks and commodities.

MBS also find reason to outperform simply because they found reason to underperform when Treasuries were benefiting more directly from the China-related flight to safety.  We can see a Treasury-specific view of that range-breakout in the next chart.  We can also see how quickly and how resolutely 10yr yields have returned to the preexisting range (or "pre-Fed" range, as the case may be).

Whether or not this range remains intact through next Wednesday (Fed Day) remains to be seen.  If there is anything in the near-term that's destined to push 10's out of the range, we're not seeing it on the calendar of scheduled data and events.  Such a move would have to come from a snowball of tradeflow momentum.  If that occurs in the absence of data, it will be a solid clue as to which way the market is leaning ahead of the Fed (i.e. breaking strongly above 2.20 means a more pessimistic outlook for bonds heading into next week).