MBS Still Lagging, But Not Losing Ground Thanks to Overnight Rally

Once again, the bond market is starting the domestic session with 10yr yields several bps lower day-over-day.  We can credit European bonds for that overnight influence which, in turn, can credit things like weaker employment data, lower oil prices, and optimistic expectations for this Thursday's European Central Bank (ECB) announcement. Also in the same vein as yesterday, MBS are not doing quite as well as their Treasury benchmarks, even if we use a fairer comparison like 5yr Treasuries (up an eighth of a point in price versus only 0.03 for 6.0 UMBS).  This could be as simple as modestly elevated supply in newly originated MBS combined with normal patterns surrounding Treasury auctions and jobs week.  It will merit a deeper investigation if the trend continues next week.

Here's a quick and dirty way to use MBS Live charts to check relative performance in MBS over various amounts of time.  At a minimum, use a 5 day chart, but 1-3 months is probably ideal.  In this example, we use a 1 month chart which captures two good recent highs and lows.  We're also using a 5yr Treasury yield as that will be even more forgiving (i.e. if MBS are still not doing as well as the 5yr, it's even easier to say they're underperforming).  As for the methodology, it's as simple as seeing how each security is doing relative to the recent highs and lows.  In this case, MBS is still about 30% below its recent high whereas the 5yr is very close to making it back to its recent low.