MBS RECAP: Tepid Selling Pressure Sending Mixed Signals

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When you have a day as weak as last Friday was, the most informative subsequent trading session is one that is either similarly weak or strongly positive.  In either of those cases we’d get some measure of confirmation or refutation about what Friday really was.  

As it stands, today’s session did more to thread the proverbial needle, leaving the bigger picture in limbo.  On the surface, it certainly looked like markets were in the process of confirming last week’s bounce, but there are several caveats that paint a more balanced picture.  

First, keep in mind that there was an extra day of trading to which domestic markets were quickly trying to catch up.  Asian equities markets were up substantially.  US stocks also gained a ton of ground today, but it was nowhere near what the typical correlation with Asian equities markets would suggest (i.e. the SP was up less than 4% from Thursday’s close while the Nikkei was up roughly 10%).  

In addition, US bond markets coped with vast amounts of new corporate issuance today.  Apple, alone, brought $12 bln in new supply to the market and was joined by several other large issuers for a total of more than $20 bln.  That’s a big day of issuance, and it means that Treasuries were effectively playing with a handicap (easily seen in the fact that MBS were unchanged on the day while 10yr yields were more than 3bps higher).  

Long story short, we have bond markets essentially holding their ground while global equities markets stocks surged.  10yr yields remained under the more critical 1.84% level as well.  None of this guarantees that bonds will continue to hold their ground, or even that we’re not in the process of bouncing toward higher rates, but neither does it confirm those unfriendly developments.

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