The recent reality for bond markets can be viewed in several ways. We could consider the longer term trend toward higher rates or the more recent phenomenon of exceptionally thin summertime tradeflows making it easy for momentum to shift and run. Think of interest rates like an inflatable raft on a pond. Volume is like the number of passengers in the raft and decreased market participation in the summer months is like the water being frozen. Fewer people make it easier to push and the slippery surface means it goes farther when pushed.
This is why we can be looking at 6bp increase in 10yr yields despite an apparent lack of causality. Naturally, on a day like next Friday, when more people are in the office and where the news matters more, we'd expect markets to be moving in a more logically correlated manner with the news. If you're looking for a more detailed account of how and why we're in the red this morning, check out the 9:24am update in the list below (highlighted).
MBS Pricing Snapshot
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Pricing as of 11:03 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
ECON: Pending Home Sales Fall More than Expected
- Pending Sales down 1.3 pct vs -0.5 pct forecast
- Market Reaction: None. If anything, the bigger surprise here is that sales didn't decline even more. Markets don't tend to react much to PHS data anyway, but this is close enough to consensus in light of the much MUCH bigger miss in the Census Bureau's version of the data.
Pending home sales were down in July, with higher mortgage interest rates slowing the market, according to the National Association of Realtors.
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, declined 1.3 percent to 109.5 in July from 110.9 in June, but is 6.7 percent above July 2012 when it was 102.6; the data reflect contracts but not closings. Pending sales have stayed above year-ago levels for the past 27 months.
Lawrence Yun, NAR chief economist, said there is an uneven pattern around the country. “The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown. However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West,” he said. “More homes clearly need to built in the West to relieve price pressure, or the region could soon face pronounced affordability problems.”
Bond Markets Weaker Overnight as Risk Trade Shows Signs of Fatigue
There are no satisfyingly singular headlines to account for the bounce higher in Treasuries yields overnight. Rather, it's a combination of factors that we've been discussing for several days, in addition to the "signs of fatigue" in the geopolitical risk trade.
The factors over the past several days include:
- The technical trading patterns in Treasuries that suggested a potential consolidation was in the works even before the Syria situation flared up.
- The reluctance of domestic bond markets to follow most other markets experiencing a 'flight-to-safety' trade.
- The fact that yesterday marked the best 4-day winning streak for MBS since mid 2012.
The technical resistance level at the 5-yr moving average being sought out by 10yr yields yesterday.
- The generally thinner-than-normal trading conditions plaguing summertime weeks, making it easier for markets to change on a dime.
- The fact that bond markets appeared to simply be grudgingly acquiescing to the flight-to-safety rally--potentially using it as a "hide-behind" for a move they probably would have made anyway after hitting multi-year high yields last week.
Most recently, we have equities markets flatlining overnight. Of course it could be the case that more losses are in store, but for now, this is the first time in the two days of exceptionally brisk selling (ostensibly related to Syria) that S&Ps have hit a a low and stayed there for more than a few hours (1627.75 in S&P futures currently vs 1627 at y'day's close).
Bond markets are definitely pouncing on these early signs of the flight-to-safety rally running its course. Overnight headlines discussing the 2 day timeline of bombings in the works adds to the sense that the "world police" countries aim to reprimand Syria as opposed to start a war.
Add to that the meaty part of the auction cycle arriving today and bond markets are more than justified in lifting off the accelerator if they weren't already by everything else mentioned above.
MBS are expressing their sympathy with 9 ticks of weakness so far, bringing Fannie 4.0s down to 103-07. 10yr yields are up to 2.76 and we once again must contend with the 2.74-2.75 levels potentially acting as a pivot-point. Pending Home Sales is released at 10am and the 5yr Auction hits at 1pm.
Live Chat Featured Comments
Victor Burek : "don't confuse me with logic mg"
Matthew Graham : "Market Reaction: None. If anything, the bigger surprise here is that sales didn't decline even more. Markets don't tend to react much to PHS data anyway, but this is close enough to consensus in light of the much MUCH bigger miss in the Census Bureau's version of the data."
Victor Burek : "i'm surprised we aren't getting any love after todays data"
John Tassios : "Let's talk about another weaker housing report, this validates what the MBA data has been telling us for the past 2 months"
Matthew Graham : "RTRS- EASED U.S. RULE WILL MANDATE BANKS RETAIN SOME RISK OF MORTGAGES WHEN BORROWERS ARE SPENDING MORE THAN 43 PCT OF MONTHLY INCOME TO REPAY DEBT, PROHIBITS SOME LOAN FEATURES "
Matthew Graham : "RTRS- US FDIC DIRECTORS VOTE TO PROPOSE NEW RISK RETENTION RULES FOR LENDERS, BOND ISSUERS"
Matthew Graham : "RTRS- U.S. JULY PENDING HOME SALES +6.7 PCT FROM JULY 2012 "
Matthew Graham : "RTRS- U.S. JULY PENDING HOME SALES INDEX -1.3 PCT (CONSENSUS -0.5 PCT) TO 109.5 -REALTORS "
Jason Harris : "It just comes down to how does the Fed decide to unwind QE....current plan seems to be about a six month taper to zero. If they actually go this route I think market shock will have this turned around by Q1 2014, and we will be back to debating whether they should add stimulus. I think the only way this works is to do it so gradually that the market can't react...something like 2 or 3 billion a month...evenly split....anything else will be deflationary IMO"
Michael Gillani : "In my opinion, the best possible thing for housing right now would be a postponement of Fed tapering and a drop in bond yields and rates into the fall/winter, which would actually serve as a huge boost to housing because everyone and their mother would make a mad dash for buying a house or refinancing if they had remotely been thinking about it in order to not miss the boat this time. A rate drop now would be the best stimulus the housing market could ask for and would carry us through to next "
Victor Burek : "if they only cut treasuries and leave mbs alone, would that cause rates to spike further?"
Michael Gillani : "Are these people just ignoring the facts? Or continuing to do so? I guess the narrative sounds better than the truth."
Michael Gillani : "It's amazing that even with the recent spike in rates and the housing data that is already starting to trickle in reflective of the higher rates, that the consensus is that the housing recovery is so strong that it will withstand a dramatic hike in rates as well as the lackluster employment situation and continue to grow and expand?"
Matthew Graham : "http://www.mortgagenewsdaily.com/08232013_new_home_sales.asp"
Louie Colatriano : "MG, do you recall what new home sales were last week?"
Matthew Graham : "REUTERS POLL - U.S. 30-YEAR MORTGAGE RATE TO AVERAGE 4.17 PCT IN 2013, 4.90 PCT IN Q4 (UP FROM 3.58 PCT IN 2013 IN MAY POLL) "
Matthew Graham : "REUTERS POLL - U.S. HOUSING MARKET RECOVERY TO CONTINUE EVEN IF FED TAPERS MBS PURCHASES "
Jason Anker : "none of my ideas would be good. i think thats not a loan. "
Jason York : "anyone have any good ideas on this scenario: Insurance agent has been with his company for about 12 years, doing inside sales, less than a year ago, a branch position opened and he was promoted, he used to be paid w-2 on his performance, like normal, but now as the branch manager, he is being paid on the bottom line performance of his branch, he has just been taking draws since he started in this position, I think he has draw receipts, but doesn't get a normal paystub, and will now file as a sol"
John Tassios : "it's been several days of good buying in a slow month for MBS / TSY's, today may be a bit of profit taking pullback , plus the 5 year auction price concessions"
Andy Pada : "yeah, this was sort of expected...but could all turn around on home sale data"
Ira Selwin : "been the new norm for a bit now"
Ira Selwin : "range"
Christopher Stevens : "Fading the 10YR after a 20bp improvement. Perhaps this is the level we hold until next bit of economic news. "
FPH : "Time for a bounce"
Victor Burek : "no headlines that I have seen"
Cory Bannerman : "Let me rephrase my question Are there in the headlines to suggest Why we are in the red this morning"
Cory Bannerman : "Gm all... whats with the red?... any ideas for the drop?"
Christopher Stevens : "No 'Septaper'? http://www.marketwatch.com/story/syria-emerging-market-crisis-will-stop-the-taper-2013-08-28"