As opposed to one of those enigmatic trading days where MBS and Treasuries are moving rapidly in either direction without clearly being associated to a market-moving event, today's market movers are right out in the open. At least they WERE right out in the open during the European session. Bottom Lines Are These:
- Rates have been trending higher in the intermediate and longer terms with trends beginning mid 2012 and more prominently in November 2012
- There has been a recent short term "counter-trend" leading back from the high rate levels on the first day of 2013 when 10yr yields hit 1.97+ intraday and closed at 1.91
- Wednesday saw the short term counter-trend edge across the boundary of the medium term uptrend (we had a chance to break out!).
- Thursday gave pause to that optimism as rates moved back into the most equivocal possible territory, leaving them an opportunity to either proceed with the positive trend or move back into the negative trend
- A one-two punch in Europe overnight with the biggest jump in Germany's business climate index since early 2010 and a bigger than expected payback announcement for banks that borrowed from the ECB's long term refinancing operations
- German Bunds (Europe's equivalent of the US 10yr Treasury) tanked severely moving up 15bps from yesterday afternoon. Treasuries followed.
- Even though the adjustment is swifter in the EU, it still takes domestic bond markets well into the medium term trend higher in rates, itself contained by the longer term trend higher. Unpleasant stuff there...
- MBS continue to trade inside their own intermediate-term trend lower in prices.
- None of this means that the global economy is "fixed," and there's plenty more room for rates to move higher without anything being fixed. We're simply seeing some...SOME of the "panic premium" being priced out of global risk-free bond markets. In other words, when risks of an EU collapse and resulting global economic contagion were most prevalent, Investors flocked to core European debt--aka the probably "last countries standing in terms of currency strength if the Euro collapsed. Treasuries benefited from that spillover, as well as aggressive Fed policy which was arguably driven in part by the European-led downward global economic spiral. Markets are just now, in the past several months catching a glimpse of a scenario where the global economy does not, in fact, collapse, and the result is playing out in bond prices presently. This is a rising rate environment, and it would take a 10yr yield moving below the mid 1.6's to change that longer term trend.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
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Pricing as of 11:06 AM EST
Morning Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts
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Why Are Bond Markets So Much Weaker This Morning?
The overnight session began with relative stability for bond markets. The best proxy for MBS overnight, US Treasuries, were flat during Asian hours, but things took a turn for the worse in the European session.
The first culprit was simply some stronger-than-expected economic data in Germany. The IFO business climate index was already expected to be slightly stronger for the 3rd straight month, but economists were planning on something more along the lines of "leveling off" vs noticeable upticks in Nov and Dec. Instead, January's numbers beat the consensus and rose by the biggest month over month margin since early 2010.
German Bund yields were already fairly quickly on the rise after the data, pulling US Treasury Yields up as typically the case in the overnight session. Then things got even uglier when bank repayments of the ECB's LTROs (Long-term refinancing operations, which the ECB used to pump cheap liquidity in to the European banking system without directly printing money in late 2011 and early 2012).
Today was the ECB's first announcement of how much LTRO money has been repaid, and the amount--€137.16--was on the high end of expectations. Even more meaningful is the fact that 278 out of 523 banks will be repaying early. The Euro is at it's highest since late 2011 following the news.
Since yesterday, German Bunds are up 15bps. Though not as close to the epicenter of the blast, US Treasuries took heavy damage as well, moving up 11bps since yesterday morning (7 of them from yesterday's close) to 1.92+. We have to throw the "+" in there this morning because things are moving too fast to pin down for a particular moment in time.
Domestic traders pushed back against the overnight weakness at first, but continued weakening into domestic trading hours. Volumes are big, and the implications potentially dire if we don't find a way to bounce back below at least 1.91 in 10yr yields. Fannie 3.0s are just about half a point weaker at 103-21 and annual closing lows aren't far below at 103-18.
Live Chat Featured Comments
Joe Ridings : "thanks matt. all my sources wont do it anymore unless they hold the first. will try first citizens though."
Matthew Graham : "RTRS- US DEC SINGLE-FAMILY HOME SALES -7.3 PCT VS NOV +9.3 PCT (PREV +4.4 PCT) "
Matthew Graham : "RTRS- US DEC SINGLE-FAMILY HOME SALES 369,000 UNIT ANN. RATE (CONS 385,000) VS NOV 398,000 (PREV 377,000) "
Brent Borcherding : "http://blogs.wsj.com/marketbeat/2013/01/18/gluskins-rosenberg-bear-market-for-treasurys-dont-bet-on-it/"
Gus Floropoulos : "my opinion is that they must keep rates as low as they can to sustain RE values"
Moshe Berg : "Even though we monitor all of this on an hourly basis, the fact remains that with all the back and forth, best execution rates for the last few months have hovered between 3.25 and 3.5. Some would call that amazingly stable "
Matthew Graham : "they're still historically quite tight since QE3. I wouldn't look to that for any major salvation against a big rates sell-off"
Scott Valins : "MG is there room for MBS TSY spreads to tighten or are the in the normal range?"
Matthew Graham : "Very interesting point you raise MH. And interesting to consider that Merkel's comments on Japan came out around the same time as the LTRO announcement."
Jeff Anderson : "The Euro is digging it for sure."
Matt Hodges : "repayment of LTRO and japanese manipulation of currency seemed to cause this selloff last week"
Andy Pada : "I think we all need (myself included) to stop rationalizing our hope for lower rates, and simply ask "What Would Markets Do?" WWMD? "
Matthew Graham : "again, you need to divorce the concepts of "economic health" and "panic/uncertainty." "
Jeff Anderson : "Isn't u/e still going up and the austerity measures still kicking in? giving the LTRO some money back definitely takes some panic out of the market, but I don't think they're going anywhere too fast."
Christopher Stevens : "with the 10YR in this consolidation pattern since the start of the year I would think the next directional move will be through the high on 1/4"
Matthew Graham : "nothing has to be fixed in order for that huge panic.uncertainty premium to be beginning to unwind. "
Matthew Graham : ""all is well," things being "fixed," etc... None of that has anything to do with anything. As I've said and continue to say, there is a huge amount of panic/uncertainty premium in core EU debt markets that's spilled over into US TSY demand. As you may have noticed, I like to call attention to the fact that US 10yr yields only ever dropped to 2.06 at our most panicked moments in the era before we realized that Europe was a factor. It was only Europe that got us below that (this is debatable, "
Matthew Graham : "Those three years we had Europe on the downswing. Better hope things change to make that the case again in 2013, because without the panic/uncertainty premium from a European collapse, things don't turn around this time."
Edgar : "2010, 2011, 2012 - higher yields in the spring, lower yields in the summer/fall. This is just v. 2013"
Christopher Stevens : "European Central Bank President Mario Draghi said on Friday that financial markets are experiencing "relative tranquility" at the start of this year and all the indices point to a substantial improvement of financing conditions. "The level of economic activity is in the process of stabilizing at very low levels and we foresee a recovery in the second part of the year," Draghi said at the World Economic Forum in Davos.
Matthew Graham : "yeah, Bunds got destroyed overnight. The bigger LTRO repayments, at first glance, look to have been the bigger deal than the positive economic data"
Edgar : "Spring is upon us...everything is fixed and getting better."
Gus Floropoulos : "technicals getting smashed up"
John Tassios : "Europe banking news killed bonds overnight / it looks bad this morning when MBS market opens up / maybe buyers will come in later in the day and they may come back a little bit"
Oliver S. Orlicki : "pricing is going to get slammed today"
Chip Harris : "10 yr not playing nice."
Oliver S. Orlicki : "Going to be ugly today"