MBS RECAP: Late Day Risk Rally Leaves Bond Markets In The Red


Most other days, the sort of price drop in Fannie 3.5’s heading into the 2pm hour would be cause for concern, but viewed in the context of today’s narrow range, we instead see that prices moved from 104-15 to 104-12 and are back to 104-13 at the moment, still 2 ticks better on the day. The entire day’s range for Fannie 3.5’s has been contained between 104-11 and 104-16–another narrow one.

When ranges are as narrow as they are, every little move looks like a bigger deal on the charts. But take a minute to click over the “advanced charts” to see what a small portion of the longer term ranges is accounted for by today’s movement.

It’s the same story for 10yr Treasuries where yields have scarcely moved outside 1.74 – 1.71. In that tiny framework, even a normally uninspiring Egan Jones Spain Downgrade looks like a huge event around 11:35am. That was followed by a very weird sort of completely flat leveling-off from 12:30-1:40, at which point the bond markets weakened somewhat, resulting in a mild move back toward the center of the day’s range in Treasuries and giving the appearance of a more abrupt move in MBS mentioned above.

Volume in Treasury futures is sporadic and choppy due to the rolling-over of contracts from the June delivery to the September delivery, but best we can tell, the pull back in bond markets isn’t linked to any headline. It’s probably nothing, in fact, but could be a sort of acquiescence to the Euro stopping it’s slide without relapsing back toward its lowest levels of the year just after the noon hour. That “weird holding pattern” may have been sort of a “wait and see” on new Euro lows.

No new Euro lows, so here we are, drifting a bit weaker. Weak enough for a reprice in mortgage-land? That’d be a bit harsh considering rate sheets are already in-line with Friday’s or slightly worse, but in most cases, human beings make these decisions and there is something viscerally alarming about moving from the highs of the day to the lows. We don’t see it as justified, don’t think it’s a high probability event, but would say that there’s a very small risk building for negative reprices at the moment, more pronounced with a break below 104-11.

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