MBS MID-DAY: Bond Market Melt-Down Continues, High Volume, Extension Risk In Play
Another day, another chance to ratchet to the next higher technical pivot point for Treasury yields and next lower for MBS. Today's sell-off began around 2am as European bond markets came online and immediately began selling. We've heard that Asia was selling even before that, but whether it's the chicken or the egg, our goose got cooked. Fannie 3.0s are down over 3/8ths of a point already, and are actually a few ticks weaker from ugly opening levels. Extension risk is in play for the lower coupons (more on "extension risk" HERE
), potentially prompting some earlier-than-normal reprices for the worse. Morning data was of little solace to bond markets which are instead trading a technical and structural framework. Volume is very high, signifying the trend of weakness remains intact and that today's weaker levels are more than mere "low volume summertime volatility."
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 11:09 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts
and updates issued via email and text alert to MBS Live subscribers
German Bond Traders Reach For Snooze Button, Hit Sell Button Instead
Before yesterday afternoon, the first significant "double top" for Treasuries was seen on 8/3 after rising from the late July all time lows. That kept 10yr yields under 1.60--a level we discussed as being an informative pivot point at the time. After that broke on 8/7, we've essentially been drifting painfully weaker in both Treasuries and MBS until getting our first glimpse of the possibility of another potential supportive ceiling as 10's made a new double top at 1.7309.
This raised the question: could this finally be evidence of a supportive event that marks the end of the recent sell-off? Or was it merely another short term glimmer of hope amid a broader, ongoing trend of selling?
That question was definitively answered before we even got in the door this morning. In fact it was answered shortly after Europe got out of bed. Given the utter lack of market moving motivation at the time, it's clear that Europe woke up and simply began selling. Bond markets at home and abroad simply drifted sideways overnight until the 2am German Bund open at which point Bunds promptly sold off 5bps. It was as if European bond traders mistook the "sell" button for the "snooze" button on the metaphorical alarm clock.
Alarms consequently rang for Treasuries as well who followed the move higher in yield, hitting 1.79 at the highs. This very simple perpetuates the trend of weakness. Paradoxically, it's both frustrating and comforting that the trend is being driven more by serendipitous technical and structural trading in lighter volume than normally accompanies such moves.
It's rare anymore to see an economic report have a meaningful impact on the trading range, although those technical and structural tradeflows do a great job of hiding behind the data releases. Case in point, volume swelled noticeably at 8:30am this morning, but neither took out the highs or lows of the overnight session.
Mix in the fact that all this is occurring while most of the European governance is out on vacation and the notion we mentioned yesterday of the "cats playing while the dogs are away" continues to seem plausible.
Whatever the case, we're in the red, and though 10yr yields have bounced back down into the 1.76's, the fact is that earlier high yields have only served to expand the recent range in it's same unfriendly direction. This trend is not your friend. Fannie 3.0s are down 6 ticks on the day currently at 102-17.
ECON: Industrial Production And Capacity Utilization In Line With Expectations.
* Output +0.6 vs +0.5 consensus
* CapU 79.3 vs 79.2 consensus
* Manufacturing Output in line with consensus
* Overall, this one was a Snoozer. Markets much more keen to trade the technical and structural scene.
Industrial production increased 0.6 percent in July after having risen 0.1 percent in both May and June. Revisions to the rates of change for recent months left the level of the index in June little changed from its previous estimate. Manufacturing output rose 0.5 percent in July, the same rate of increase as was recorded for June. In July, the output of mines increased 1.2 percent, and the output of utilities rose 1.3 percent. At 98.0 percent of its 2007 average, total industrial production in July was 4.4 percent above its year-earlier level. Capacity utilization for total industry moved up 0.4 percentage point to 79.3 percent, a rate 1.0 percentage point below its long-run (1972--2011) average.
ECON: Treasury International Capital For June
The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for June 2012. The next release, which will report on data for July 2012, is scheduled for September 18, 2012.
The sum total in June of all net foreign acquisitions of long-term securities, short-term U.S. securities, and banking flows was a monthly net TIC inflow of $16.7 billion. Of this, net foreign private inflows were $28.8 billion, and net foreign official outflows were $12.1 billion.
Foreign residents increased their holdings of long-term U.S. securities in June – net purchases were $5.5 billion. Net sales by private foreign investors were $1.4 billion, and net purchases by foreign official institutions were $6.8 billion.
At the same time, U.S. residents decreased their holdings of long-term foreign securities, with net sales of $3.9 billion.
Taking into account transactions in both foreign and U.S. securities, the net foreign purchases of long-term securities were $9.3 billion. After including adjustments, such as estimates of unrecorded principal payments to foreigners on U.S. asset-backed securities, the overall net foreign acquisition of long-term securities is estimated to have been negative $6.0 billion in May.
Foreign residents increased their holdings of U.S. Treasury bills by $1.7 billion. Foreign resident holdings of all dollar-denominated short-term U.S. securities and other custody liabilities decreased by $1.0 billion.
Banks’ own net dollar-denominated liabilities to foreign residents increased by $23.7 billion.
ECON: Consumer Price Index Lower Than Expected
The Consumer Price Index for All Urban Consumers (CPI-U) was
unchanged in July on a seasonally adjusted basis, the U.S. Bureau of
Labor Statistics reported today. Over the last 12 months, the all
items index increased 1.4 percent before seasonal adjustment.
Major indexes posted small movements in July, with a 0.3 percent
decline in the energy index offsetting 0.1 percent increases in the
indexes for food and all items less food and energy. Within energy,
declines in the indexes for electricity, natural gas, and fuel oil
more than offset a small increase in the gasoline index. Within the
food component, the food at home index was unchanged with major
grocery store food group indexes mixed, while the food away from home
The index for all items less food and energy rose 0.1 percent in
July, ending a streak of four consecutive 0.2 percent increases. The
shelter index rose 0.1 percent for the second month in a row. The
indexes for medical care, tobacco, household furnishings and
operations, and apparel also increased, while the indexes for airline
fares, used cars and trucks, recreation, and new vehicles all
The 12-month change in the index for all items was 1.4 percent in
July. This compares to 1.7 percent in June and is the smallest 12-
month change since November 2010. The index for all items less food
and energy rose 2.1 percent for the 12 months ending July, a slight
decline from the 2.2 percent figure in June and its smallest increase
since October 2011.
ECON: Empire State Manufacturing Contracts For First Time Since Oct 2011
The August Empire State
Manufacturing Survey indicates
that conditions for New York
manufacturers deteriorated over
The general business
conditions index slipped below
zero for the ﬁrst time since October
2011, falling thirteen points to -5.9.
At -5.5, the new orders index was
below zero for a second consecutive
month, and the shipments index
fell six points to 4.1. The prices
paid index climbed nine points to
16.5, pointing to a pickup in the
pace of increase in input prices,
while the prices received index
hovered just above zero for a third
consecutive month. The index for
number of employees inched lower,
but remained positive at 16.5,
suggesting a moderate increase
in employment levels, and the
average workweek index rose to
3.5. Indexes for the six-month
outlook were generally positive
but lower than in July, indicating
that respondents expected business
conditions to improve little in the
In a series of supplementary
questions, manufacturers were
asked about modiﬁcations to 2012
hiring and capital spending—both
year-to-date changes and revisions
planned for the rest of the year.
Substantially more ﬁ rms (roughly
twice as many) made downward
than upward revisions in their plans
for the second half of the year. As
for actual spending year-to-date,
modest downward adjustments
were made, on balance. When
asked about negative inﬂuences on
2012 hiring and capital spending
plans, a majority of respondents
cited increased uncertainty about
Live Chat Featured Comments
Andrew Horowitz : "1.87 Owl"
Chris Kopec : "Where is resistance once we push over 1.80?"
Victor Burek : "here is a good read on Hollande, http://globaleconomicanalysis.blogspot.com/2012/08/hollandes-honeymoon-is-over-54-of.html"
Matthew Graham : "if markets had priced out a euro collapse, we'd be over 2.5%"
Matthew Graham : "not by a longshot."
Victor Burek : "hasnt the market already priced in positive news from the eurozone"
Matt Hodges : "rofl... as incompetent as we remember them to be.... priceless"
Matthew Graham : "Europe's been silent for two weeks. European governance is out of the office, so to speak. It's interesting to me that this coincides with the technical bounce off all time best levels for bond markets and that--despite great volume relative to the last week--markets are backing up in generally low, summertime volume on an ostensible lack of any motivation other than the technical "wave-riding." Traders and analysts keep scratching their heads trying to swim against the waves, and I wonder i"
Edgar : "T. Nelson....agree that we need a few weeks to clear the pipe. Also a little bump in rates will get the 3.00% 30 year fixed crowd off the bench and locking when we get back to the 3.625 - 3.50 level. Happens every time: rates hit a an absurd low, people want to wait for another .25% and missi it. "
Andrew Horowitz : "what if the next euro bomb is positive for the eurozone"
Thomas Nelson : "What does that mean MG?"
Matthew Graham : "at the very very least, it will be "interesting" to see what happens when Euro leaders' email auto-responders are turned off in a week or two"
Steve Chizmadia : "Economy is not fixed, europe is not fixed, we just haven't heard or seen a report recently with hard confirmation of those facts or I should say convincing enough numbers to confirm those facts. "
Thomas Nelson : "Not to be greedy, but it would be great to hold like this for 2 weeks or so to clear the pipeline (and stop taking calls from people who think rates have gotten better).............then have September go down again. Okay, let's get greedy. Gordon Gecko style."
Steve Chizmadia : "It's a market correction in which we've seen or heard no real news or information to hold MBS at all time highs and rates at all time lows. I'm not worried"
Kunal Khanna : "while rate are still very good the recent sell off trend is slightly worrying."
Thomas Nelson : "Talk about a guy with bad luck.....One of our customers was closing yesterday...........but couldn't because the builder hadn't been on title for 90 days. Application can't get taken until Aug 20th.....closing Aug 31st, so no chance to wait on rates getting bettter. He HAD 3.375% no closing costs on a 30 year."
Matthew Graham : "RTRS- U.S. JULY CAPACITY USE RATE 79.3 PCT (CONS 79.2 PCT) VS JUNE 78.9 PCT (PREV 78.9 PCT) "
Matthew Graham : "RTRS- U.S. JULY INDUSTRIAL OUTPUT +0.6 PCT (CONSENSUS +0.5 PCT) VS JUNE +0.1 PCT (PREV +0.4 PCT) "
Matthew Graham : "RTRS - JAPAN U.S. TREASURY HOLDINGS $1.1193 TRLN IN JUNE VS $1.1089 TRLN IN MAY "
Matthew Graham : "RTRS - CHINA U.S. TREASURY SECURITIES HOLDINGS $1.1643 TRLN IN JUNE VS $1.164 TRLN IN MAY "
Matthew Graham : "RTRS- U.S. JUNE NET LONG-TERM INFLOW (EX-SWAPS/OTHER) $9.3 BLN VS REV $55.9 BLN INFLOW IN MAY "
Matthew Graham : "RTRS - JUNE NET FOREIGN PURCHASES OF US TREASURY BONDS, NOTES $32.5 BLN VS $45.9 BLN PURCHASES IN MAY "
Adam Dahill : "Pain trade. "
Jason Harris : "No doubt Jason....rates under 4%...if you have told me that 5 years ago I would have thought you were drunk"
Ira Selwin : "From FHA MH: Mortgage lenders may collect from the borrower those customary and reasonable costs necessary to close the mortgage with the exception of the Tax Service fee, which may not be charged to a borrower. "
Jason Adams : "I locked a couple of new clients yesterday as well. I think we get wrapped in a bubble, Rates re still insane right now. "
Matt Hodges : "we just received guidance on FHA tax service fees. We only charged them IF seller paid. We are now told they can not be charged ever"
Matthew Graham : "RTRS - U.S. JULY CPI YEAR-OVER-YEAR +1.4 PCT, LOWEST SINCE NOV 2010 (CONS +1.6 PCT); EXFOOD/ENERGY +2.1 PCT, LOWEST SINCE OCT 2011 (CONS +2.2 PCT) "
Matthew Graham : "RTRS- U.S. JULY CPI EXFOOD/ENERGY RISE SMALLEST SINCE FEB 2012 "
Matthew Graham : "RTRS - U.S. JULY CPI 0.0 PCT (+0.0459; CONSENSUS +0.2 PCT), EXFOOD/ENERGY +0.1 PCT (+0.0905; CONS +0.2 PCT) "
Matthew Graham : "RTRS- NY FED EMPIRE STATE CURRENT CONDITIONS INDEX BELOW ZERO FOR FIRST TIME SINCE OCT 2011 "
Victor Burek : "retail numbers yesterday put an end to qe3..at least in sept"
Matthew Graham : "RTRS- NY FED'S EMPIRE STATE NEW ORDERS INDEX -5.50 IN AUGUST VS -2.69 IN JULY "
Matthew Graham : "RTRS - NY FED'S EMPIRE STATE EMPLOYMENT INDEX AT +16.47 IN AUGUST VS +18.52 IN JULY "
Matthew Graham : "RTRS- NY FED'S EMPIRE STATE CURRENT CONDITIONS INDEX -5.85 IN AUGUST (CONSENSUS 6.50) VS +7.39 IN JULY "
Paul L. Martin : "Bloomberg late last night.... UK seeking to turn over bank oversight to ecb with each country central bank taking a reduced role. Seemed to be the first big step to sharing bailoit pain"
Jeff Anderson : "104 handle. Noooo. Remember when we hoped a 104 handle?"
Jeff Anderson : "GM, all. Where's did you hear/see that Paul? Don't see it anywhere...yet."
Oliver S. Orlicki : "Sea of red continues"
Paul L. Martin : "EU Tape Bomb....ECB movign to Fed Model of oversight...EU 'fixed'."