Relative to the past two months of relatively tame day-over-day movement
and relatively light volume, domestic bond markets have had more than
their fair share of big swings recently, with the top 3 widest trading
ranges in 10yr yields of the past two months falling within the past 5
trading sessions. On the surface, that doesn't seem too hard to accept
given that this week offered a rare concentration of economic offerings
with FOMC, ECB, and NFP all in juxtaposition.
Sprinkle in some under-the-radar headlines helping the "risk-on" trade
out of Europe on top of the already negative bond-market impact from the
bullish NFP print and Treasuries/MBS were relatively shattered this
morning ("relatively" is intentionally used here as even the half point
move in MBS hasn't taken us out of a long term trend channel).
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
Pricing as of 4:08 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts
and updates issued via email and text alert to MBS Live subscribers
Bond Markets Picking Up What Few Pieces Remain, Mostly Good Ones
Now with volume dying way down, and with European bullishness no longer propping up the domestic risk-on trade, bond markets are picking up the few pieces that remain and are finding those to be mostly positive.
Fannie 3.0's are back up to 103-18 after hitting lows right on that long term trendline at 103-11 earlier today. 10yr yields matched last Friday's highs just over 1.59 and have since ebbed cautiously back in a friendlier direction.
It's tempting to hope for this correction to continue, and while that's a possibility, it really comes down to the will of whoever is left trading. 10's would first need to cross a technical no-mans-land between 1.563 and 1.558 before we could even consider such a thing and thus far, they've bounced before getting into that fight.
Even so, we're better off than we were, and the simple task of holding under 1.60 would be still be positive from a technical standpoint heading into the weekend. All that said, we're not sure how much more significance we'd read into trading levels for the rest of the day. 10'd biggest volume move was stopped out at 1.55-ish, with minor ancillary pops that stayed under 1.592.
So unless volume surges in a big way, we've basically seen what there is to see today, and can only just keep an eye on MBS for any potential supply/demand/liquidity related spikes. So far, so good in that regard as Fannie 3.0's have held 103-18 for the entire time this update was typed.
EFSF Sneaking In The Back Door... Today's Secret Market Mover?
An inventory of what we know, by way of background:
1. Draghi essentially promised to buy peripheral debt last week. Peripheral spreads (namely Italian and Spanish) rallied. Core sovereigns (namely US and Germany) sold off. MBS followed.
2. The sell-off was a minor inconvenience at the end of last week, but the greater fear--as cynical as markets may have been about it--was that Draghi and the ECB would actually make good on the promise/threats
3. Draghi fell flat on his face yesterday in delivering on the threats, but instead, simply made additional promises that the ECB would find a way to get involved in buying peripheral debt (essentially the same stuff he said last week). Peripheral spreads sold off again, and core sovereigns rallied. Hurray...
4. In the intervening time, it's important to note that when Draghi met with the Bundesbank chief, although the German Central Bank was "not cool" with the ECB buying bonds directly or with the ESM getting a banking license so it could borrow directly from the ECB, they did in fact mention that the EFSF would be the preferable channel to conduct such bond-buying if it ever happens.
That brings us to today's big secret news--too abstruse for the mainstream media to pick up and cite as a bigger market mover than NFP and bordering on too abstruse for us to do a decent job of covering, but we'll do our best.
European banks this morning received requests from the EFSF to open repo lines, which has long been hypothesized as a way for the ECB to get around German opposition to direct bond-buying in the long end of the European periphery. We don't know exactly how this is going to play out yet, and neither do markets, but for now it is seen as an actual ACTION (as opposed to promises) that suggests a super-sized buyer of sovereign debt is stepping into the market.
This has led to major tightening in Euro zone peripheral spreads--basically "last Friday part 2: now with action!" And generally speaking, when Euro zone peripheral spreads are tightening, risk appetite is increasing, and domestic bond markets are selling off, just as they are today.
Low Volume Selling Continues, Leaving MBS At Week's Lows
MBS are currently in line with their lowest levels of the week, matching yesterday's lows in Fannie 3.0's of 103-14. Similarly, 10yr yields are at 1.5768, essentially in line with yesterday's high of 1.577. 10's were as high as 1.5908 last week after Mario Draghi's London speech. Low volume is a factor in the price action as things have slowed down dramatically after the 11am European bond market close.
Most lenders' rate sheets came out in fairly conservative territory to begin with, but any additional losses would increase the risks of a negative reprice given that we're currently at these "line in the sand" levels.
Live Chat Featured Comments
Matthew Graham : "RTRS- POLL-3 PRIMARY DEALERS THINK FED COULD CUT INTEREST PAID ON EXCESS RESERVES "
Matthew Graham : "RTRS- POLL-PRIMARY DEALERS SEE QE3 SIZE RANGING FROM $275 BLN TO $600 BLN, MEDIAN $500 BLN "
Matthew Graham : "REUTERS POLL-MEDIAN FORECAST FOR QE3 BY FED SHOWS 63 PCT CHANCE AMONG 16 U.S. PRIMARY DEALERS (70 PCT IN JULY 6 POLL WITH 16 DEALERS) "
Scott Valins : "feels good to see that triple test and rejection in 10yr that took place around noon"
Victor Burek : "REPRICE: 1:24 PM - Nexbank Worse"
Andrew Horowitz : "so who bails out the EFSF when they run out of money lol"
Matthew Graham : "yeah, it looks like there's questions to how much impact it can have because of that ceiling, but their actual cash would be leveraged in this process. (but i think there's also a ceiling on that leverage)."
Andrew Horowitz : "MG didn't the EFSF come with a ceiling attached to it?"
Jason Oelrich, CPA : "MG, That was a nice synopsis!"
Eric Franson : "REPRICE: 12:43 PM - Wells Fargo Worse"
Matthew Graham : "If anyone in the room can clarify, refute, or in any way, expand on that brief synopsis, you're highly encouraged and more than welcome to do so."
Matthew Graham : "best I can tell (and I'm sorry, that's not very well in this case), the EFSF can buy sovereign debt, from Spain for instance, Repo that debt out to a commercial bank, commercial bank can use repo as collateral with ECB, get cash, give cash back to EFSF who then gives cash back to Spain for and squares up with the original debt they purchased. Ipso facto, ECB bought Spanish debt, but didn't really buy it."
LSP : "REPRICE: 12:33 PM - M&T Bank Worse"
Matthew Graham : "Still... it may turn out to be more of a symbolic gesture than an actual blank check for EU peripheral debt."
Matthew Graham : "I don't think anything I've researched or considered has done more to make me cry and feel stupid than today's EFSF news. "
Jeff Anderson : "Well the new alert isn't going to make me sleep any better over the weekend. Thanks, MG."
Alan Craft : "No. Use the link blow to look up by county"
Andy Pada : "thanks guys. But to be clear, since there is no category for the super conforming/high balance, we can assume a max. loan limit of $625,500.00"
Alan Craft : "Change Limit Type to Fannie/Freddie"
Alan Craft : "https://entp.hud.gov/idapp/html/hicostlook.cfm"
Jeff Anderson : "Wow. European equities went on a tear today. They must be fixed."
SMTM : "https://www.efanniemae.com/sf/refmaterials/loanlimits/xls/loanlimref.xls "
Alan Craft : "In some states, yes. Fl, no"
Alan Craft : "Monroe County (Keys) is the exception"
Andy Pada : "how about for super conforming? does it go up to $625K or is li lower"
Alan Craft : "99% of FL is 417k"
Alan Craft : "417k for 1 unit"
Andy Pada : "anyone know what it is for palm beach county, fl?"
Andy Pada : "is there county loan limit on Super Conforming/High Balance loans?"
Ira Selwin : "Plenty of people use Franklin american"
Mike Drews : "FAMC does no income qualifying streamlines...so yes."
Roger Moore : "yes"
Oliver S. Orlicki : "Does anyone still use FAMC?"
Ira Selwin : "REPRICE: 11:54 AM - Franklin American Worse"
Bert Swyers : "i think we take a crack at 1.60"
Jill Statz : "REPRICE: 11:34 AM - Provident Funding Worse"
Bill Laffey : "i think we're primed to bounce off 12:00 and finish with a classic "V" formation."
Matthew Graham : "flirting for now, 1.5769 y'day"
Matthew Graham : "just crossed week's highs in 10yr yields"