MBS RECAP: Stocks Break Higher, Bonds Don’t Follow

Stocks and bonds continued on their divergent paths today thanks to the European Central Bank.  While there had been some speculation that the ECB would indicate some sort of curtailment of its bond buying program (yes, this happens a lot), the central bank instead reiterated its commitment to finishing the program.  ECB President Draghi also made it a point to discuss China’s limited impact on the European banking system. 

Stocks soared.  The movement was unequivocally a direct result of the ECB press conference, though it was aided along the way with several earnings reports.  Bonds were another story–at least in the US.

While the European bond market did just as well as equities markets (i.e. German Bund yields dropped significantly), US Treasury yields barely managed to hold flat on the day.  In fact, 10yr yields were slightly higher for most of the morning.  Strong stocks were part of the reason, but we’ve seen stocks and bonds diverge enough recently to advise us against leaning on that as an explanation. 

We know there was a good amount of corporate bond issuance today, with big deals from JP Morgan and Coca-Cola.  The ill effects became all the more clear when the deals ‘priced’ (meaning they were finally able to be traded).  Because the corporate bond ‘pricing’ phase means that there is no longer a need for the issuer to sell Treasuries in order to hedge interest rate exposure, there can be a small but noticeable relief rally afterward.  That was the case today as 10’s rallied down to 2.003 by 2pm.

Throughout the day, MBS outperformed Treasuries.  This was partly to do with the corporate issuance having a more direct effect on Treasuries, but just as much to do with the yield curve.  That refers to the varying levels of performance across the spectrum of Treasury maturities.  In today’s case, shorter term debt outperformed, and MBS have a slightly shorter implied duration compared to 10yr Treasuries.   At the close, Fannie 3.0s were up 3 ticks at 101-24 while 10yr yields were perfectly flat at 2.028.

Article source: http://www.mortgagenewsdaily.com/mortgage_rates/blog/521575.aspx

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