Treasuries and MBS were coming off a rough day heading into this morning's Employment Situation Report. 10yr yields hit their highest levels and MBS hit their lowest levels in more than 2 years yesterday as strong economic data suggested investors prepare for today's jobs numbers to be similarly strong.
If it had been, it would have stood as a tacit affirmation that the Fed would reduce asset purchases in line with market expectations on September 18th. As it stands, the data was not that great, but perhaps not bad enough to deter the Fed from tapering. 13 of 18 Primary Dealers still think tapering happens on the 18th, up from 9 of 18 after last month's jobs report, but this time the median size of the reduction is seen as $15bln vs $18bln previously.
In short, yesterday's weakness spoke to markets being prepared for data today that would have gotten even more consensus among dealers. Today's bounce back speaks to the presence of a shadow of a doubt, albeit a less clearly visible one, that tapering isn't the foregone conclusion it might have been this afternoon.
The fact that the doubt is even remotely present was good enough for all of yesterday's weakness to be erased right out of the gate. MBS spent the rest of the day mostly holding on to those gains while Treasuries let them slip away in the longer end of the yield curve (10's and 30's crossed back into yesterday's range). This same "crossing over" never really happened for MBS, and especially not for the 4.0s and 4.5s that most rate sheet quotes will be based on.
In thinking about what lies ahead, it was easy to see a reluctance in bond markets, to jumping back in the water with two feet. This was more of a "well ok... let's see where they're going with this weaker-than-expected jobs data," as opposed to an "OMG! Buy buy buy!" The adjustment back to yesterday's levels was quick and minimal in the grand scheme of things. 10yr yields had trouble breaking back down through 2.90 and hit the 3pm close at 2.94. Could this mark the beginning of a moderate consolidation ahead of the 9/18 FOMC Meeting? Maybe, but it feels like this market wanted/wants a bit more weakness before committing to a more meaningful correction.
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 4:07 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
Getting Slippery For Treasuries; MBS Perking Up; Negative Reprice Risk Growing
To be clear, MBS are perking up in a bad way as Treasuries slide into weaker territory this afternoon. 10's are now up to 2.936, and while this doesn't necessarily mean anything compared to the much more active trading this morning, it has been a bit too much weakness for MBS to simply ignore.
Fannie 4.0s are now "only" up 19 ticks on the day at 102-07, near the same prices that earlier prompted a reprice risk warning. Same story here: moderate risk at these levels with more pronounced risk if we head lower.
Beware the 'Pipeline Control' Reprice Despite Improved Pirces
MBS have marched steadily higher since the last semi-cautionary update just before noon. Paradoxically, at least two lenders have repriced NEGATIVELY during that time. We would NOT chalk this up to the moderate weakness that prompted the original update, but rather to the lenders in question.
Several lenders are prone to 'pipeline control' reprices and these are two of them. There are a few others out there, and if you do business with them, you know who they are. Heading into this Friday afternoon with significantly improved morning rate sheets, we can't rule out a few other similar reprices.
Perhaps even more interesting is the juxtaposition of positive reprice potential for other lenders. There's nothing extreme here, but the charts have that look about them that they sometimes get before a certain price leader reprices positively.
Fannie 4.0s are up 26 ticks at 102-14 and 10's are down 9.5 bps at 2.90.
MBS Off Best Levels; Negative Reprice Risk Mostly Contained
There's only a small amount of negative reprice risk for a select few lenders at the moment as MBS have come off their highs by 8 ticks. Those lenders would either have had to price at those highs or otherwise come out of the chute overly aggressive this morning for prices to be forcing their hand however. Most lenders that priced later in the morning would have done so with MBS already 4 ticks or so off the highs.
Fannie 4.0s are currently at 102-08, up 20 ticks in total on the day and right in line with yesterday morning's highs. 10yr yields are down 8.2bps on the day at 2.914, but have been trending higher since the initial post-NFP rally down to 2.865. The highest post-NFP yields were hit right at 9:30 with 10's at 2.921. If they break that ceiling, MBS may be more willing to break their post-NFP floor around 102-06. Negative reprice risk would increase if that happens.
Live Chat Featured Comments
No Featured Market Discussion
Learn More about Market Discussion on MBS Live