After the initial show and awe of last week’s QE3, MBS moved abruptly to their best-ever levels as well as their best-ever level of outperformance vs Treasuries. In other words, for any given Treasury yield, MBS yields were much lower.
That spread corrected moderately in the days that followed and began going more sideways, never rising above what had been best-ever levels before QE3 (in other words, it was still a record level of outperformance). But it increasingly looks like the “rising and flattening out” phenomenon was merely MBS way of “taking a breather” and letting Treasuries get caught up. The “flattening out” from Tuesday and Wednesday suggests markets found their short term boundary for MBS’s trading relationship to Treasuries and have moved the other way (back toward outperformance) on Thursday and again this morning.
This degree of the outperformance isn’t such that MBS will be able to have big, green days when Treasuries are well into negative territory, but on morning’s like this where Treasuries are just barely weaker, MBS are able to be slightly stronger. It’s been a calm and gradual process, but we’re back to new all-time highs today in Fannie 3.0s, currently up 3 ticks on the day at 104-26.
10yr yields are still about 2.5 bps weaker after a choppy overnight session fueled by Euro-headlines. This is the only thing markets really had to go on given the utter absence of scheduled economic data and events. That continues to be the case although there’s a scheduled Fed buyback at 10:15-11:00am, and of course the weekly ECRI numbers at 10:30 which we never mention because they never matter.
At the moment, though, the pressing concern seems to be the cash open for equities. On a slow day without data it’s not unreasonable to expect a bit of correlation in “the stock lever,” and to that end, equities look set to open higher and have been breaking above overnight highs in futures as the opening bell rings presently.