MBS MID-DAY: Bond Markets Extending Post-Fed Weakness; Data Not Helping

By: Matthew Graham

Yesterday was obviously bad for bond markets.  The shift in tone from the Fed caught many market participants off guard.  Since the announcement, Fed Funds Futures have moved to price in better than a 50 percent chance of a December hike versus about a 1 in 3 chance before the announcement.

While it wouldn't have been unfair to expect traders to take more time to come to terms with the surprise (read: more selling today), bond markets actually began the overnight session holding relatively steady.  It wasn't until the earliest domestic trading activity began that we started to lose ground. 

The GDP data didn't help.  Even though the headline was weaker than forecast (1.5 vs 1.6), there was a significant impact from an inventory reduction (1.44 percent).  That means GDP would have been closer to 3 percent without the inventory fluctuations.  Indeed, the "Final Sales" component was exactly 3.0% versus estimates for 2.8%.  Traders often factor out the more volatile month-to-month inventory impact and today was no exception as bonds continued to weaken after the data.

9am brought a dark horse market mover in the form of Germany's higher-than-expected inflation.  Eurozone inflation, in general, has been a big consideration for rates in 2015, and Germany is the biggest component.  Bond yields and oil prices surged.  The response was far more pronounced compared to GDP half an hour earlier. 

By the time the 10am data rolled around, the tradeflow snowball had taken over.  No one cared about Pending Home Sales, despite the big miss (-2.3 vs +1.0 forecast).  We're currently pushing the upper limits of an important inflection point at 2.135 (yields are up at 2.156, so obviously, we'd be hoping for a 2bp rally by the 3pm official close).


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
100-31 : -0-10
FNMA 3.5
103-31 : -0-07
FNMA 4.0
106-11 : -0-05
Treasuries
2 YR
0.7190 : +0.0120
10 YR
2.1560 : +0.0550
30 YR
2.9490 : +0.0710
Pricing as of 10/29/15 12:58PMEST

Morning Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
10:29AM  :  ALERT ISSUED: FN 3.0 Down 9/32nds; Negative Reprice Risk Increasing
9:41AM  :  ALERT ISSUED: Fannie 3.0 Down 5/32nd Since 9am; Some Reprice Risk for Early Lenders
9:38AM  :  Bond Markets on the Run Following GDP and German Inflation Data

Live Chat Featured Comments
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Matthew Graham  :  "Steve, first of all, I'm not convinced that's the key issue here, but if it is, I would guess they don't see a few modest hikes as upsetting the apple cart too much. They'd rather have room to cut if needed. A few of them have even said this."
Steve Schneider  :  "if this is the 'dry tinder' theory, wouldn't their be an "equal and opposite" reaction? (why trouble the water to only fix it - unless only wanting to have the appearance of fixing something?) Sorry so generalized."
Matthew Graham  :  "RTRS - U.S. INTEREST RATES FUTURES IMPLY TRADERS SEE 50 PCT CHANCE OF U.S. RATE HIKE IN DECEMBER, VS 43 PCT WEDNESDAY AND 6 PCT A MONTH AGO - CME GROUP'S FEDWATCH"
Matthew Graham  :  "RTRS - U.S. SEPT PENDING HOME SALES +3.0 PCT FROM SEPT 2014 - NAR"
Matthew Graham  :  "RTRS - U.S. SEPTEMBER PENDING HOME SALES INDEX -2.3 PCT (CONSENSUS +1.0 PCT) TO 106.8 - NAR"
Matthew Graham  :  "HICP = Harmonised Index of Consumer Prices. (effectively "CPI")"
Matthew Graham  :  "RTRS - GERMAN OCT PRELIMINARY HICP UNCHANGED M/M, +0.2 PCT Y/Y (VS REUTERS CONSENSUS FORECAST OF -0.1 PCT M/M, +0.1 PCT Y/Y)"
Matthew Graham  :  "RTRS - US JOBLESS CLAIMS ROSE TO 260,000 OCT 24 WEEK (CONSENSUS 263,000) FROM 259,000 PRIOR WEEK (PREVIOUS 259,000)"
Matthew Graham  :  "RTRS - US Q3 BUSINESS INVENTORY CHANGE CUTS 1.44 PERCENTAGE POINTS FROM GDP CHANGE"
Matthew Graham  :  "RTRS - US ADVANCE Q3 GDP +1.5 PCT (CONSENSUS +1.6 PCT) VS Q2 +3.9 PCT; FINAL SALES +3.0 PCT (CONS +2.8 PCT), Q2 +3.9 PCT"