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Bond Markets Slightly Weaker Overnight; Fighting to Hold Ground
Posted to: Micro News
Wednesday, July 9, 2014 9:49 AM

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Treasuries have given up a small portion of yesterday's gains and MBS have given back nearly all of theirs.  That highlights the 2-day phenomenon of MBS losing ground versus Treasuries, which is a bit alarming considering the opposite is normally the case heading into the roll (tomorrow in this case).

It's all the more alarming that it's occurring on a 10yr Treasury auction day.  Those normally coincide with Treasuries underperforming MBS.  Market participants tend to build in a concession (higher yields and lower prices) leading up to an auction.

In fact, that sort of concession is very likely one of the factors behind today's weakness.  It's just that MBS are finding reason to be incrementally weaker.  The reason, in this case, is the official monthly prepayment report that came out on Monday.  There is often an effect on MBS's relative performance vs Treasuries following that report, especially if speeds come in faster/slower than expected ("speeds" refers to how quickly a particular pool of MBS is being paid off, which is one of the key variables in MBS valuation).

Beyond the auction concession, equities markets are heading the other direction today.  Yesterday's stock losses correlated with bond gains.  Both reversed course at the same time yesterday and both are heading in the same direction today (stock prices and bond yields, that is).

MBS are bouncing along 2-day lows at the moment, down 5 ticks at 102-06.  Treasuries came into the domestic session at their weakest levels of the day, recovered slightly, and are now fighting a return to those weak levels ahead of this afternoon's 10yr auction.

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