MBS RECAP: Reaction to ISM Data Shows Markets are Desperate for More


We have a couple things going on at the moment. The most significant event of the day has been a resoundingly weak ISM Non-Manufacturing report. The other overt and more recent factor has been a series of comments from Fed’s Williams that tie Fiscal uncertainty to tapering prospects.

The less quantifiable forces involve an ongoing slide in market sentiment surrounding the government shutdown combined with a planned slide in market sentiment surrounding the change over from the second the third quarter.

Planned slide? All that means is that stocks were the market’s darling in the 2nd quarter. The asset allocation among managed funds shifted heavily out of bonds and into stocks. Regardless of all the political drama and economic data, there’s a natural impetus to exhale after inhaling. There’s a natural consolidation in markets after faster-paced movement. The dramatic events simply confirm that it makes sense to take this breath now.

That’s more of a broad theme, however, and we only discuss it to offer an explanation for stocks and bond yields moving in the same direction again (after months of moving in the opposite direction for the “QE on/off” trade). More pressing at the moment are the solid gains in MBS.

Fannie 3.5s are up 10 ticks now at 102-03. Several lenders who priced early in the session have already repriced positively and others will likely begin joining them at these levels, assuming they hold or are improved upon.

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