MBS RECAP: Early Month-End Buying Boosts Bonds

By: Matthew Graham •
  • Early month-end trading environment provided constant support
  • Strong Durable Goods headline didn't matter
  • gains were linear into the noon hour, then leveled off, and came back after the 7yr Auction
  • 10yr yield ended 4.2bps lower at 1.83

Bonds didn't do much through the overnight session, but so-called "duration needs" became apparent right as domestic traders sat down for the day.  "Duration needs" refers to bond traders' need to own a certain mix of bonds that satisfy the "duration" requirement of an index that their investors expect them to hit.  

In other words, if my portfolio has some money allocated to bond markets based on a certain index, and if that index is expressed in a duration of 7.5 years, I need to own bonds that average out to a 7.5-year duration.  If own $10 worth of 5yr Treasuries, I'm going to need to buy $10 worth of 10yr Treasuries by the end of the month.

Today was an obvious unofficial deadline for "month-end."  Tomorrow is a half day and Tuesday is the first day back after a holiday weekend.  It was far safer for traders to satisfy their duration needs by today, and indeed, many had already done so before today.  

The constant stream of support meant bonds marched to their own beat with little regard for stocks or economic data.  The 7yr auction certainly didn't hurt.  Not only did it come in stronger than expected, but it marked the end of the week's Treasury supply.  Traders who didn't meet their duration needs with winning auction bids were quickly forced to look elsewhere, and bonds continued to improve as a result.  

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
102-10 : +0-07
Treasuries
10 YR
1.8300 : -0.0400
Pricing as of 5/26/16 5:58PMEST
Today's Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
9:56AM  :  Data Ignored as Month-End Buying Boosts Bonds
MBS Live Chat Highlights
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Sung Kim  :  "and i would also argue that a significant reason mods failed is people saw no point in paying down a loan which was upside down"
Sung Kim  :  "they probably have negotiated variances - dont poo poo it"
Brian McFarlane  :  "it's part of their feud with FHA."
Brian McFarlane  :  "pure marketing. I love how they say they will go down to 620. You have a better chance hitting the powerball, than you do getting that loan with a 620 credit score."
Timothy Baron  :  "Nice piece of marketing there."
Beau Hodson  :  "TB - News Alert - Wells Fargo is ensuring borrowers have ability to repay and now offering Fannie Mae Products!"
Frank Hanna  :  "TB, reads that way for sure. PLus DU is making the call on approvals not Wells."
Timothy Baron  :  "Isn't this just the standard Fannie 97% program? http://www.cnbc.com/2016/05/26/wells-fargo-launches-3-down-payment-mortgage.html"
Frank Hanna  :  "chart slide Thursday!"
Matthew Graham  :  "RTRS - FED'S POWELL SAYS FED HAS SUBSTANTIAL CHALLENGE IN COMMUNICATING THAT DOT PLOT OF RATES IS NOT A POLICY PROMISE"
Matthew Graham  :  "RTRS - FED'S POWELL SAYS U.S. ELECTION CYCLE PLAYS "ABSOLUTELY NO ROLE" IN FED DELIBERATIONS"
Matthew Graham  :  "RTRS - FED'S POWELL SAYS HOLLOWING OUT OF MIDDLE CLASS A SERIOUS NATIONAL PROBLEM BUT OUTSIDE SCOPE OF MONETARY POLICY"
Matthew Graham  :  "RTRS - FED'S POWELL SAYS HAS NOT YET DECIDED WHETHER TO VOTE FOR A RATE HIKE IN JUNE"
Matthew Graham  :  "RTRS - FED'S POWELL SAYS INFLATION HELD DOWN BY AS MUCH AS 40 BPS BY OIL PRICES AND THE DOLLAR"
Matthew Graham  :  "RTRS - U.S. 7-YEAR NOTES BID-TO-COVER RATIO 2.57, NON-COMP BIDS $24.99 MLN"
Matthew Graham  :  "RTRS - U.S. SELLS $28 BLN 7-YEAR NOTES AT HIGH YIELD 1.652 PCT, AWARDS 20.25 PCT OF BIDS AT HIGH"
Matthew Graham  :  "7yr auction coming right up. Estimated yield is 1.658, with most 7yr auctions tending to come in under the estimate but occasionally missing big. The average bid to cover is 2.51 and indirects average just over 60%"