MBS and Treasuries are having a rough day after a one-two punch from European headlines and a lousy 30yr TIPs auction. We’ll start with the latter as it’s a bit less straightforward and paradoxically more confusing than the EU news (which almost always seems to be more confusing). Confusing because markets traded this weak 30yr TIPs auction as if it were a regular 30yr bond auction, selling the long end of the yield curve (moves rates higher) after seeing a higher-than-expected yield at the auction as well as weaker-than-average demand. TIPs rarely ever move markets as noticeably as they did today. We’re not sure why the fact that accounts don’t want to sign up for lower than-market-yields in exchange for an inflation adjustment during a period in economic history where inflation is very much on the back burner, was taken as some suggestion of weaker demand for the long end itself. A bit of a puzzler, but more of an “insult to injury” situation with the “injury” occurring on the earlier Greek weekend bond swap news. Here are the two alerts from MBS Live on that Topic:
Possible Negative Reprices After News On Greek Debt Swap – 11:42 AM
RTRS- – EURO ZONE CENTRAL BANKS TO EXCHANGE THE GREEK BONDS THEY HOLD FOR NEW BONDS TO HELP GREEK DEBT DEAL – PAPER
MBS are down 12 ticks at the moment at 103-13 and negative reprices are likely if prices stay close to these levels or fall further. More to come….
Greece’s Weekend Debt Swap Today’s Big News (12:48 PM)
There has been a lot of “noise” this week concerning various aspects of the Greek bailout, including a motley influx of headlines about an hour ago. The only market mover of the group is the news that the ECB is airlifting itself off the sinking ship, so to speak. Over the weekend, the ECB will swap out their Greek debt in exchange for similarly-termed debt minus the imminent guaranteed loss and implicit involvement in a private sector bond swap expected to follow Monday’s approval of the bailout.
Since the ECB bought these bonds at a discount, they’ll have some cash left-over as the bonds are being swapped out at face value. That cash goes back to the various Euro zone states from whence it came. Although the party line is that EU states can do whatever they want with the cash, the tacit instruction from the ECB is “Hey you guys… Here’s some cash for you to give to Greece.” While simply “giving cash to Greece” may be a gross oversimplification, it’s not an inaccurate one.
The idea is that this will not only get the ECB out of dodge ahead of Private sector negotiations, but will also help lessen the haircut requirements that seem to have risen almost uncontrollably (from 50, to 60, and now 70 per cent).
That’s what’s behind bond-market weakness in a nutshell, not the flowery talk of expected approvals of bailout packages. No one really cares what Euro zone officials THINK will happen with the bailout vote. This ECB swap news is something substantive that markets can sink their teeth into. So far those teeth have taken a bite out of MBS prices, along with Treasuries, but those losses seem to have found some support as markets realize that the news is more about “housekeeping” ahead of next week’s events than it is some epic shift in the handling of Greece’s bailout.
Bond markets were heading rather sideways after the first dose of losses on the Greece news, but were “kicked whilst down” by the 30yr TIPS trade. Despite that, longer-term support from a pivot point at 103-10 is holding up so far, despite the clear downtrend on the day:
(Source: MBS Live Dashboard)
Here’s a look bigger-picture look at Fannie 3.5 MBS, including the 103-10 pivot point, the long term trend channel, as well as pivot points/technical levels of interest at 103-18 and 103-29. Note: the lower chart is a zoomed in view of the highlighted section of the top chart, with some different trendline configuration.
Treasuries are contending with a potential “counterattack” against their prevailing bullish trend-channel, although the upper limits of that trend channel have not yet been tested.