Bond Markets Weaker Into US Session After Calm Overnight Trading
Fannie 4.0s are down a quick 5 ticks at the open and 10yr yields are up 2.3bps before any data or significant news have had a chance to be digested. The culprits are the same as they have been (and likely will continue to be next week).
What are those and why?
Because economic data can't be traded upon in a normal way right now due to the weather debate, other trading cues are having an outsized effect. One of the bigger considerations this week and next is the corporate bond market. Without overcomplicating the issue any more than necessary, suffice it to say that one strategy employed by firms who are issuing debt is to sell Treasuries in order to lock-in their rate of return between the time their offering is priced and fully subscribed. If you want to read a little more about how that works, our old coverage of the Verizon bond deal is a reasonable primer (read it...).
So as corporate bond issuance has ramped up this week and is expected to be high next week, it has brought some understandable pressure to Treasuries and, by extension, MBS (corporate issuers aren't locking rates with MBS, but when they do so with Treasuries, MBS are indirectly affected).
Beyond that, market movement is awarded to whoever is clamoring the loudest to make it happen. Right now, we're hearing/seeing that from the "fast money" crowd (leveraged, short term, speculative trading, primarily associated with hedge funds. The opposite would be "real money," which is typically associated with strategic, long-term, less risk vs reward type investing of entities such as insurance funds and money managers. Think tortoise vs hare). Long story short, we've simply had one vocal segment of the investor community clearly favoring selling this week. They don't have to offer an explanation or justification. It just is.
One guess as to what these tactical traders see to prompt this bias is that the combination of the technical environment and the "weather debate" gave a pretty clear signal (in hindsight at least) that 10yr yields in the high 2.5s were about a quarter of a point too low. Mid to upper 2.7's would be a much more central/neutral zone in what has been a 2.47 to 3.05 range for 8 months.
Neutral and central is a good place to be when the normal significant market motivations cease to motivate. If this assessment pans out, selling momentum should lessen or reverse as yields rise out of the central zone (Feb 12th is a good example of this potentially already happening once). In the time it took to type that, MBS are already back up 2 ticks and 10yr yields fell about 1bp.