MBS RECAP: Surprising Post-NFP Rally Just a Consolation Prize?


MBS are undergoing a watered-down version of a short squeeze at the moment. Whereas they hadn’t been too popular compared to Treasuries in recent weeks, the ‘not-too-crazy’ Employment data this morning keeps risk of December tapering fairly minimal (some would debate this). This in turn keeps liquidity as high as it can be during a very illiquid time of year, and helps MBS relative to Treasuries.

As hinted at, some market participants see today’s data as suggesting a higher likelihood of tapering. In that case, the outperformance doesn’t make as much sense. Whatever the case, there is solid demand for MBS from accounts other than the Fed for the first time in several sessions. Those who had been betting against mortgages are being forced back in, and any accounts that waited to do this until this afternoon are now looking at a bit higher level of urgency. That’s reflected in the late-day price spike, but unfortunately, more indicative of tactical considerations as opposed to long term strategy.

Fannie 4.0s are now up an impressive 13 ticks to 103-26 while Treasuries are still hanging around unchanged levels with 10yr yields at 2.8571

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