MBS MID-DAY: Green on The Screen, But No Time For Complacency

I was going to title this mid-day post something like "uneventfully holding most of yesterday's losses," but I almost fell asleep just writing it.  The point was supposed to be that the overall situation for bond markets is still pretty bad, regardless of this token bounce back from yesterday's weakness.

Here are a few of the reasons:

First of all, the bounce back leaves Treasuries very much in line with yesterday's post-sell-off levels.  10 yr yields were holding in a range of 2.147 to 2.165 for several hours after yesterday's sell-off and they're currently down to only 2.155.  We'd really want to be seeing 2.135 at the close if we were going to take something positive away from today's session.

Adding a layer of concern to the tepid rally is the fact that today is the last day of the month.   Barclays' final update of its Treasury index (which dictates the nature of month-end buying in bond markets) suggests strong support for the long end of the yield curve (10s-30s).  In other words, we can assume that much of today's 'green on the screen' is a factor of month-end buying.  That leaves us to wonder what Monday will look like.

The point of all this is to not get complacent just because we've recovered some of the losses.  For all intents and purposes, bond markets are flat vs yesterday.  MBS is something of an exception, but here too, month-end plays a big role.  The MBS index was updated in an even more favorable way than the Treasury index, thus prompting money managers to buy a few more MBS than they otherwise might to put on October's books.