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Bond Markets Shrugging Off Stronger GDP; MBS at Best Levels
Posted to: Micro News
Friday, December 20, 2013 9:44 AM

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Fannie 4.0s are back into positive territory, up 2 ticks at 103-02 after having fallen to 102-21 on this morning's GDP data. Treasuries moved up to new 3-month intraday highs of 2.966 briefly and are now back down to 2.911.

While GDP was stronger than expected, a few things have worked in our favor since the data. First, as is always the case with GDP, it speaks to stale data. That doesn't make it irrelevant, but less of a market mover than its household name status suggests.

Then there's the matter of holiday volume and tradeflows. Volume is, of course, lighter than usual into the second half of December, and today is no exception. That means that any positional biases (traders being predisposed to make certain trades regardless of data and events) have a bigger-than-normal effect.

Once Treasuries hit the 2.96's for the second time this morning and held their ground, the trading positions that were betting on a steeper yield curve (2-3yr lower in yield and 10-30yr higher) had an opportunity to continue unwinding (i.e. trading in the other direction--in this case higher 2-3yr yields and lower 10-30yr yields).

This quickly drew out a big block trade at 9:19am in 10yr futures and a 30yr bond block trade at 9:22am. That helped the momentum continue running in a positive direction for MBS, with the lower Treasury yields prompting "short-covering" as well (traders who had been betting on higher rates being forced in to 'cover' those trades as they become less profitable).

All of the above has run its course for now and we're waiting on the next move. Volume is that much lower now vs 9-930am, making tradeflow and positional considerations all the more likely to motivate any movement.




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