MBS RECAP: Bond Markets Unable To Sustain Corrective Pace


Today started off well enough for MBS and Treasuries.  Although the first part of the overnight session was a bit weaker, European trading helped get us back in line with unchanged levels in the morning.  From there, the morning’s only significant economic data–New Home Sales–fell on deaf ears despite being significantly stronger than expected. 

Invariably, some people will make the connection between higher rates and stronger data today, but it’s just not even close to being the case.  Bond market IMPROVED after that data, and hit the best levels of the day a full 40 minutes later.  It would be over an hour before we even returned to pre-data levels in Treasuries. 

So what’s moving markets then?

That question has to be answered with a grain of salt today as trading activity was fairly light.  It didn’t take much to get things moving and there are several candidates for motivation.  These include:

1. The stock lever (i.e. stock prices and bond yields moving together).  We talked about this in-depth in this morning’s Day Ahead.

2. European Market Close and 5yr Auction.  Europe is like the US in that there’s an initial close for stocks and a later closer for bond markets.  That later close is right at 1pm–same as the 5yr Auction.  Either of these events could have contributed to the turning point at 1:30pm.

3. Corporate bond pricings picked up at 1:30.  As we’ve recently discussed, firms offering new bonds can hedge their risk during the subscription process by selling Treasuries when the deal is initially priced.  Roughly $5bln in corporate debt was priced today.

4. Technicals.  We’ll talk more about this in tomorrow morning’s Day Ahead, but bond markets met some technical resistance at this morning’s best levels.  The bounce could have been a done deal from then on, but could have been waiting for the 5yr auction before getting too crazy.

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