MBS RECAP: Back to Unchanged After Massive Supply Disruption

Today's trading session began with bonds in only slightly weaker territory.  The overnight session brought general pressure from stronger global equities markets with the charge being led by the Nikkei (best day since 2008).  Even then, Treasuries had an air of weakness about them that couldn't quite be explained by movement in related markets.

As the Day Ahead suggested, the explanation for any weakness would likely have something to do with corporate bond issuance.  That reality came crashing through the door just after 8:30am as the deluge of corporate deal announcement washed over the street.  By the end of the morning, there were a record number of deals for any single day in 2015. 

As we've discussed incessantly, corporate debt issuance hurts bonds on two fronts.  It creates extra supply in the market and it CAN create temporary selling pressure because some firms choose to 'lock' their rate of repayment and effectively do so by selling Treasuries.  Those trades are frequently unwound, but only after the new bond has sold off to investors.

Today's big issue was the supply glut.  More than $26 bln in corporate debt collided with $21 bln in new 10yr Treasury debt.  This is a lot to ask of bond market investors even after factoring out the maturing debt being paid back to investors this week from Treasury holdings (some of which is always presumably reinvested at auction).  Trading levels showed the protest.  10's moved as high as 2.254 by 9:13am.

Yields remained elevated until the afternoon hours.  The 10yr auction passed right as many of the corporate deals were starting to launch.  Bond markets essentially went from high alert on the topic of debt supply to a far calmer state in  a matter of minutes.  The proverbial lowering of the guard is easily seen in today's chart.

MBS were never as upset as Treasuries today.  That makes sense considering that corporate supply has a direct bearing on the associated Treasury security.  In other words, a 5yr tranche of a corporate bond would imply 5yr Treasury selling in order to lock the rate, and so on.  MBS, on the other hand, are just adjusting as much as they have to in order to keep pace with broader bond market movements.  Treasuries typically lead the charge.  MBS typically follow (though they can find their own reasons to adjust the distance by which they're following).  Today was no different.