MBS RECAP: Brexit Punt Successfully Delays The Game


As expected, the result of the emergency EU summit overnight was a hefty brexit extension, giving the UK until 10/31 to approve a compromise deal to leave the EU.  At face value, this wasn’t the conclusion bonds wanted, because it keeps economic hope alive.  Indeed, there’s no doubt that yields would have been down sharply overnight if Britain was told “sorry, no deal… you get a hard brexit!”  But what about next week and the week after? 

It’s entirely possible that simply moving PAST the big uncertainty would have hurt bonds more than the overnight extension deal. After all the overnight extension deal only put about 2bps of upward pressure on 10yr yields, and it hurt MBS even less.  At least this way bonds can benefit from the uncertainty that surrounds the October deadline, and we still get the benefit of not having to talk about brexit for another few months!

The 8:30am domestic economic data didn’t do bonds any favors, however, with stronger Jobless Claims and Producer Price data adding to the overnight weakness.  The 30yr bond auction was arguably in the same camp, but not excessively so.  When the smoke cleared, 10yr yields were just over 3bps higher on the day and still under 2.50%.  MBS only lost 3 ticks (.09).  10yr notes were down 10  ticks (.31) by comparison.

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