MBS Live Recap: No Easy Victories as Bonds Revisit Weaker Levels

Last week's bounce at a ceiling of 2.60% (twice, essentially) was enough for some DEFENSIVE hope.  In other words, it introduced the possibility of the recent selling trend running out of steam near these levels.  But as I cautioned at the time, there were connotations for a strong OFFENSE bringing rates in the other direction.  For that, we would have at least needed to break below 2.52% and preferably 2.42% in the bigger picture.  With yesterday's bounce at 2.52%, today ended up looking like a natural progression back toward higher levels.  

There were ample headlines relating to the government shutdown and stop-gap funding bill today.  At times, markets appeared to react to these, but those reactions are hard to separate from other trading considerations in play.  The 'other consideration' include esoteric, boring stuff like curve-related tradeflows, corporate deal hedging, and plain old technicals (i.e. that bounce off 2.52%, and the subsequent trading decisions based purely on math applied to trading levels themselves, as opposed to fundamental data and news).

Bonds began the day weaker, but rallied into the 11am hour--almost back to unchanged levels.  European bond trading had been a positive input, so this explains some of the weakness heading into the afternoon (Europe closed for the day around the time the sell-off began).  But we also had some debt ceiling headlines, a swath of corporate bond issuance, and a break above the 2.57% technical level in 10yr yields.  The selling ultimately didn't do any catastrophic damage, but with MBS underperforming, it did leave mortgage rates in the worst shape in roughly 9 months.  The caveat is that today's quotes are only microscopically weaker than last Wednesday's on average.