Have MBS Finally Reached The Limits of Outperformance vs Treasuries?

Bonds are in the throws of an extended negative momentum move that's been in place throughout October.  At times, stimulus-related headlines have accounted for volatility during this move.  MBS have been outperforming decisively during this time.  That makes it easier for lenders to avoid raising rates nearly as quickly as the broader bond market suggests.  But spreads are now at all-time "tights" (maximum MBS outperformance) thus increasing the risk that negative momentum in Treasuries will increasingly translate to MBS.

Econ Data / Events

  • 20min of Fed 30yr UMBS Buying 10am, 1130am (M-F) and 1pm (T-Th)

  • Markit PMI Composite 55.5 vs 54.3 prev

  • Markit Manufacturing PMI 53.3 vs 53.4 f'cast

  • Markit Services PMI 56.0 vs 54.6 f'cast

Market Movement Recap
08:24 AM

Bonds were modestly stronger during Asian market hours, with little by way of discernible reaction to the presidential debate.  Decent econ data in Europe pushed back in the other direction, but not enough for 10yr yields to be any higher versus yesterday's highs.  We're currently unchanged at .865 and 1 tick (0.03) stronger in 2.0 UMBS.

10:54 AM

Both stock prices and bond yields fell immediately following the NYSE open. Stocks are now unchanged (S&P futures vs 5pm y'day) and 10yr yields are down more than 1bp. They were down 2 bps a few moments ago, but they bounced at their overnight lows of .84% (more on the significance in this update).  2.0 UMBS are up 1 tick (0.03) at 102-29 (102.91).

03:45 PM

Bonds improved heading into the PM hours as stocks sank.  Lots of correlation today.  Stocks bounced at 1pm, but bonds managed to hold steady at stronger levels.