MBS Day Ahead: Wide Range of Possibilities With Fed Out of The Way


With the Fed-related events out of the way, we’ll finally get to see how much they mattered.  Yesterday’s initial market reaction–while negative–was anything but conclusive.  The most important observation in that regard is that the parts of the bond market that we care about didn’t move into any new weaker territory compared to Monday morning.  That seems relevant for now.

While we’re missing a conclusive verdict on what matters and where we’re headed, it’s clear that something (or a combination of somethings) is going on.  It’s probably nothing to do with domestic economic data as that has been so incredibly detached from market movements of late as to be completely useless.  Yes, we’ll still watch it and discuss it, and yes it may still garner some initial reaction immediately following certain releases, but don’t scratch your head and wonder why markets aren’t moving according the data’s suggestion.

So what’s moving markets?  Good question!  Market participants wished they knew.  It’s been a very confused era in bond market trading with plenty of “going through the motions” and “follow the leader.”  In other words, there are a few trading ideas out there, but nothing too inspired. 

It remains the case that Europe is one of the most important considerations for domestic markets, and as European markets took a break from their 2014 trend so far in September, US bond markets took a much more pronounced break!  We’ll be watching carefully in the coming days to see if that changes.

Markets have also been working through a lot of corporate bond issuance.  While this is mostly net-neutral for Treasuries and MBS, the hedging process for these corporate bonds can cause volatility for us.  That usually involves selling first and buying later.  Some of that selling has undoubtedly contributed to recent weakness, but there’s no way to know exactly how much. 

What we do know is that a lot of these deals will be wrapped up before the end of the quarter.  This will coincide next week with Treasury auctions being wrapped up by Thursday and then followed by 3 remaining trading days in the quarter.  If bonds are going to mount a comeback, it’s as good a time as any.  If they don’t, it would add extra validation to the recent weakness.

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