MBS RECAP: Slightly More Participation and Positivity


Within the recent context of the summer doldrums in bond markets, today was a bit more upbeat.  It didn’t begin that way though.  After a purely flat overnight session, Treasury yields began rising into domestic hours.  Once again, 8:20am proved to be a pivotal time of day in this less liquid environment (that’s when many accounts begin the trading day, in line with the CME ‘pit’ open).

In today’s case, buyers were lined up to take advantage of the overnight drop in prices.  We know from yesterday’s hefty corporate debt issuance that there were potential hedges in the market (Treasuries having been sold short as a part of the corporate issuance process) to be bought back.  In other words, a financial firm handling a corporate debt offering would sell Treasuries (or make an equivalent trade via a more exotic security) when the deal is announced.  This locks in most of the rate of return for the issuer (because the rate is usually “treasury yield + margin”).  Then when the deal is priced, those Treasuries can be bought back–especially if prices are lower than when the deal was initially hedged.

There’s no way to know how much of an impact this had today, but certainly, it had some.  Beyond that, there was a dearth of new issuance today after yesterday’s glut.  Bottom line: the supply considerations in bond markets were much friendlier today.  Fewer bonds to be bought = higher prices.  The longer we went without any news of a big new corporate deal, the more bond prices improved.  Weakness in equities may have played a tangential role as money managers sold stocks and bough bonds.

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