Is It Another Trap and Which Coupon Do I Watch Now?

Yesterday's bond market resilience offered hope for a bounce, but those hopes were crushed by new weakness this morning.  The move took MBS to their worst levels since last March and Treasuries, since February 2020.  Bonds recovered mid-day, begging the question: is this another trap?  Do we just get crushed again tomorrow?  Today's video discusses those prospects as well as the reasons for the shift to 2.5 UMBS 30yr fixed coupons.

Econ Data / Events

  • Fed MBS Buying 10am, 1130am, 1pm

  • New Home Sales 923k va 855k f'cast, 885k prev

  • 5yr auction: weak.  0.7bps higher than expected.  Bid to cover 2.24 vs 2.45 avg

Market Movement Recap
08:53 AM

modestly stronger in Asia, moderately weaker in Europe, and now sharply weaker as the domestic session hits its stride.  Still a momentum/snowball trade (i.e. not reacting to news or events in any obvious way, or at least news/events are not the key drivers of the bigger moves).  Big block trades around the 8:20am CME open.  10yr yields highest in more than a year at 1.42%.  UMBS 2.5 coupons (only game in town now) down 10 ticks (.31) at 103-21 (103.65)

10:33 AM

After holding a ceiling at 1.435%, 10yr yields tried (or perhaps "are still trying") to stage a bounce.  They just cracked below 1.40% briefly, but haven't flipped the switch into the sort of buying frenzy that would help confirm a near-term reversal.  Might be a tall order before the 5yr auction.  UMBS 2.5 coupons are now down "only" 7 ticks (.22) after being down more than 3/8ths of a point less than an hour ago.

01:07 PM

Rally/recovery continued into 5yr Treasury auction with MBS turning green ultimately and 10yr yields coming within 3bps of unchanged.  The 5yr auction was a bit rough, and bonds have lost ground since then--mostly Treasuries, unsurprisingly.  MBS are still 2 ticks in the green (+0.06).

02:28 PM

Additional MBS losses after the 1pm buying operation (concluded at 1:20pm).  MBS illiquid and more volatile since then, down a total of 6 ticks (.19) from the highs.  Treasuries are mostly holding sideways during the same time frame (but still 3+ bps higher on the day with the 10yr just under 1.38%).