The easiest way to facilitate a mid-day update today will be to simply copy and paste a morning update from MBS Live. Before I do that, and because I know the following content isn’t super tangible, here’s a bullet point breakdown:
- Bond markets largely unchanged overnight, then began weakening into domestic hours
- Key culprit is corporate debt issuance which causes selling pressure in Treasuries
- Potential supporting actors include an earlier speech from Fed Vice Chair Fischer
- Treasuries are leading weakness and MBS are outperforming again (typical when corporate issuance is the driver)
Without further ado, here’s the morning update that MBS Live members received at 9:30am:
There’s nothing bond markets can do about a relentless slate of corporate debt issuance apart from simply take the lumps as deals are announced and hope to claw back some of the losses when momentum subsides.
While the hedging-related aspect of corporate issuance should technically be net neutral for bond markets, the problem is the order in which the hedging takes place. Quite simply, that’s “sell now, buy back later.” The fact that the selling comes first means it has more of an opportunity to establish momentum.
That’s compounded by two other factors. First, the “announcements” of corporate debt offerings (where the hedging/negativity come in) tend to be more concentrated than the pricings (where the hedging can start to be unwound). That means a concentrated period of announcements presents a clear negative bias whereas deal pricings make for more isolated cases of positivity.
The second factor compounding the net-negative effect of corporate issuance is the fact that some traders will begin “making room” to buy the new corporate debt by selling other assets, which can include Treasuries or MBS.
With all that out of the way, suffice it to say that corporate debt issuance is taking a toll this morning. The overnight session wasn’t bad, apart from the fact that Treasuries didn’t improve after losing ground yesterday. Bond markets managed to begin the day in unchanged territory and only began losing ground after domestic trading was firing on all cylinders.
In addition to the corporate issuance pressure, comments from Fed Vice-Chair Fischer looked like they had an impact earlier this morning, but it’s anyone’s guess as to why. As an aside, that’s the highly-respected new guy as opposed to the Dallas Fed President Fisher who slings analogies about “feral hogs” and “monetary cocaine.” Fischer’s comments around the time of bond yield lift-off included the following sentiments:
– Germany needs to let its demand grow more rapidly
– Japan is doing the right thing to address its problems
Maybe markets view Fischer throwing his hat into the ring of support for European sovereign debt buying in some roundabout way. It’s also possible that markets didn’t much care about those comments and the weakness was simply due to the bigger Treasury trading accounts that come online at 8:20am.
Either way, we’re in weaker shape, with 10yr yield just now edging up to new highs for the day (+2.28bps at 2.264). As is ever the case when corporate issuance pressure is involved, MBS are outperforming, down only 5 ticks in Fannie 3.5s at 103-30.