MBS MID-DAY: Negative Reprices as Bond Markets Reverse Course

It was a rough morning for bond markets as Treasuries have really only moved in one direction since opening in Europe .  Losses were quite livable during those overnight hours, but they picked up as the domestic session began.  The key culprit was, and continues to be an influx of new corporate bond deals.  Much like Treasury auctions (which traders are also wary about this week), these add extra supply to the overall bond market.  The increased competition for investor demand typically puts pressure on prices.  The problem is compounded by the fact that Treasuries can be sold in order to protect against rising rates during the corporate issuance process.

The corporate issuance selling is further compounded by a tradeflow correction that was already underway.  This simply means that Thursday afternoon and Friday saw a capitulative rally in bond markets where anyone who'd been betting on rates moving higher was instead forced to buy bonds.  Now those traders are more flexible/nimble.  As they come into the current week, they are confronted with the corporate issuance, the looming Treasury auction cycle, and Fed speakers that are pushing back on last week's dovish stance (as expected).  So the choice is clear for them to sell.  It will be interesting and important to watch how far this selling trend goes and how long it lasts.

For now, it's caused roughly 3/8ths of a point of weakness in MBS and a 7bp rise in 10yr yields.  If you hear anyone talking about how today's weakness is primarily Fed related, kindly correct them by pointing out that 2yr yields are only up 3.63.  They'd be leading the charge if this selling was due to Fed rate hike expectations.