MBS MID-DAY: Straightforward Sell-Off, Large And Unpleasant


The overnight session began with relative stability for bond markets. The best proxy for MBS overnight, US Treasuries, were flat during Asian hours, but things took a turn for the worse in the European session.

The first culprit was simply some stronger-than-expected economic data in Germany. The IFO business climate index was already expected to be slightly stronger for the 3rd straight month, but economists were planning on something more along the lines of “leveling off” vs noticeable upticks in Nov and Dec. Instead, January’s numbers beat the consensus and rose by the biggest month over month margin since early 2010.

German Bund yields were already fairly quickly on the rise after the data, pulling US Treasury Yields up as typically the case in the overnight session. Then things got even uglier when bank repayments of the ECB’s LTROs (Long-term refinancing operations, which the ECB used to pump cheap liquidity in to the European banking system without directly printing money in late 2011 and early 2012).

Today was the ECB’s first announcement of how much LTRO money has been repaid, and the amount–€137.16–was on the high end of expectations. Even more meaningful is the fact that 278 out of 523 banks will be repaying early. The Euro is at it’s highest since late 2011 following the news.

Since yesterday, German Bunds are up 15bps. Though not as close to the epicenter of the blast, US Treasuries took heavy damage as well, moving up 11bps since yesterday morning (7 of them from yesterday’s close) to 1.92+. We have to throw the “+” in there this morning because things are moving too fast to pin down for a particular moment in time.

Domestic traders pushed back against the overnight weakness at first, but continued weakening into domestic trading hours. Volumes are big, and the implications potentially dire if we don’t find a way to bounce back below at least 1.91 in 10yr yields. Fannie 3.0s are just about half a point weaker at 103-21 and annual closing lows aren’t far below at 103-18.

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