MBS RECAP: Bonds Tank in PM Trading After Oracle Goes Big

• Bonds continued holding ultra-narrow post-Brexit range until 3pm
• At that point, Treasuries spiked aggressively and MBS eventually followed
• Initial culprit was likely the Oracle corporate bond issuance
• Markets knew this was coming, but they didn't know when or how big
• It was sooner and bigger than expected, thus putting pressure on other parts of the bond market and adding to snowball selling momentum

If you like to click links and learn more about the bigger picture bond market motivations, and if you haven't already read it, check out our primer on corporate bond issuance HERE.  If you're not into clicking links, just think about corporate bonds like any other bonds.  They cost money and offer a return on investment.  They're a bit riskier than risk-free Treasuries in the best cases, but the yields are high enough to compensate investors for that risk.  

In fact, in this market, investors are hungry for yield, so when a big corporate that's not likely going anywhere offers a big batch of corporate debt with yields that are quite a bit higher than Treasuries, it garners a ton of demand.  Investors knew Oracle was coming out with a big bond offering today or tomorrow, but they were accounting for a size of $8-10 bln.  The actual size came in at $14 bln, meaning investors who wanted to cash in on these juicy yields were quickly forced to liquidate other holdings in order to come up with the cash.  $4-6 bln in unexpected selling is a lot for bond markets to handle in the heat of a moment.

As you may have guessed, a good amount of the aforementioned "liquidated holdings" were in US Treasuries.  The selling pressure came right at a vulnerable time of day when liquidity is lighter and when traders are on guard for potential shifts in momentum relating to month-quarter end.  This exacerbated the negative momentum.  It was if the Oracle deal was the alarm bell to close out June and/or Q2 positions and head out of town for the holiday weekend.  Sure, not every trader is taking an extra 2 days off, but you'd be surprised how much of an impact such things can have.  

The bottom line was a rapid move higher in 10yr yields--at least relative to the last few days of flatness.  In the bigger picture, we'd still be waiting to see a break above 1.53% in order to suggest a broader shift toward higher rates.  MBS didn't pay attention at first, but that didn't stop a few lenders from repricing.  MBS began paying more attention as the sell-off continued, thus bringing more lenders into the negative reprice picture.