Heading into today, we knew the recent run to low rates would be a risk from a corporate issuance standpoint. The Day Ahead noted: ” Last week’s run to recent rate lows could greatly accelerate issuance plans (corporations would like to lock in borrowing costs at low rates).” And that’s turned out to be a key contributor to afternoon weakness as the corporate slate tops $20bln, much of that from one gigantic deal (Medtronic, $17bln). Amazon joined the list of corporate issuers before the day was done, making for essentially constant pressure on bond markets.
Fortunately for MBS, Treasuries serve as the basis for most corporate bond pricing so Treasuries are what’s sold during the hedging process. As such, 10’s lost much more ground today than MBS, moving well above Friday’s highs while MBS prices managed to bounce in line with their weakest Friday levels.
Also fortunate (relatively) is the fact that morning rate sheets were stronger than the early gains would have suggested. This is logically due to the conservative pricing strategies from last week (i.e. lenders holding back heading into a holiday weekend). That’s meant that this afternoon’s rate sheets didn’t end up looking all that different from Friday’s, despite widespread reprices.
We can forgive a bit of corrective volatility on the Monday following Thanksgiving–especially when it’s the first day of December to boot. Far more important and interesting will be where we go from here.