The 10yr Auction just came in much stronger than expected. Bond markets had been volatile ahead of time as the massive Verizon corporate bond offering vied for market attention. The rest of the following update will appear in the MBS Recap, but here's how we characterized the environment leading up to the auction:
Compounding all this [Verizon-related volatility] is the fact that investors are simultaneously
bidding on new supply of 10yr Treasury Notes at today's auction (results
at 1:01:30pm). Some of the weakness we're currently seeing may owe
itself to those needs. If an analogy helps, imagine you like fruit and
that you have a certain amount of money + or - a bit of wiggle room to
buy fruit for the week. You know there will be three trucks coming on
Tue-Thu with apples. you know other fruit-lovers will be there to buy
apples, and that the price of the apples will be determined by that
The price of apples also has a current "going rate." That going rate is
determined by how you and other fruit-lovers trade apples with each
other. Given that you know these three big trucks are coming with a lot
of apples, and given that you know you only have so many friends that
are fruit lovers, maybe you and your friends will trade the price of
apples a bit lower ahead of time so that you're more easily able to
clean out the trucks... (if that didn't make sense, re-read it until
it's crystal clear because that's exactly how an auction concession
Now imagine Verizon calls on Monday and says they're bringing a huge
truck load of oranges that they promise taste twice as good as those
apples. Of course, you and your fruit-loving friends dig oranges as
well, and some of you will definitely buy some. The amount of chaos
that such a "surprise deliver of super oranges in the middle of apple
week" could create is roughly similar to the chaos created by the
confluence of Verizon's deal and Treasury auction supply, ALL a week
before a potentially epic announcement by the FOMC (very big player in
the fruit scene!).
Note the timestamp on the table below. Prices are back up to the highs of the day now with Fannie 4.0s at 102-14.
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 11:08 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
Heads-Up: Eighth of a Point Lower, on the Edge of Reprice Risk
Fannie 4.0s were just down 1/8th of a point (4 ticks) from levels at which some lenders will have taken down initial indications today. It does look like MBS may be putting in a bounce at current levels, and if that continues to be the case, we may well avoid any negative reprice risk.
It's too soon to know that for sure, so this is just a heads up that we're on the edge at the moment and if prices on Fannie 4.0s go any lower than 102-10, negative reprice risk would be increasing. At 102-06, risk would be high.
ECON: Wholesale Inventories and Sales Both Weaker Than Forecast
- Inventories +0.1 vs +0.3 forecast
- Sales +0.1 vs +0.4 forecast
- Inventories/Sales Ratio Unchanged
- Market Reaction: Mildly positive at first, but now back to pre-data levels.
The U.S. Census Bureau announced today that July 2013 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $426.1 billion, up 0.1 percent (+/-0.4%)* from the revised June level and were up 5.7 percent (+/-3.0%) from the July 2012 level. The June preliminary estimate was revised downward $0.1 billion. July sales of durable goods were down 0.6 percent (+/-0.7%)* from last month, but were up 4.8 percent (+/-3.5%) from a year ago. Sales of motor vehicle and motor vehicle parts and supplies were down 3.1 percent from last month. Sales of nondurable goods were up 0.7 percent (+/-0.7%)* from June and were up 6.4 percent (+/-4.0%) from last July. Sales of beer, wine, and distilled alcoholic beverages were up 2.1 percent from last month and sales of petroleum and petroleum products were up 1.9 percent.
Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $500.0 billion at the end of July, up 0.1 percent (+/-0.4%)* from the revised June level and were up 2.2 percent (+/-4.7%)* from the July 2012 level. The June preliminary estimate was revised downward $0.2 billion. July inventories of durable goods were up 0.6 percent (+/-0.4%) from last month and were up 4.5 percent (+/-5.6%)* from a year ago. Inventories of machinery, equipment, and supplies were up 1.2 percent from last month and inventories of metals and minerals, except petroleum were up 0.8 percent. Inventories of nondurable goods were down 0.8 percent (+/-0.7%) from June and were down 1.3 percent (+/-5.6%)* from last July. Inventories of farm product raw materials were down 10.1 percent from last month.
The July inventories/sales ratio for merchant wholesalers, except manufacturers’ sales branches and offices, based on seasonally adjusted data, was 1.17. The July 2012 ratio was 1.21.
Holding Yesterday's Range After Positive Overnight Session
Treasuries held yesterday's range overnight, starting out flat during Asian hours and improving during European hours. The fact that core European debt made gains despite stronger economic data is perhaps a sign that recent rate ceilings are offering technical support.
On the other side of the coin and pond, Treasuries began the US session bottoming out right in line with yesterday's low yields. This hasn't resulted in any major selling, or even in a move back up to higher overnight yields, but it suggests that consolidation and uncertainty reign supreme until more meaningful data arrive later in the week, and especially until next week's FOMC festivities.
MBS opened the day right in line with yesterday's latest POST-ROLL levels (emphasis on "post-roll" because the two day chart will look like MBS opened lower. This is simply because the left side of today's chart reflects September coupon prices and the right side--October prices).
There's no meaningful economic data on tap for today though there is actually data. Wholesale Inventories prints at 10am, and no one will likely care. Slightly more meaningful will be the 1pm 10yr Auction.
Most meaningful of all will be everything else that can't be seen, isn't scheduled on a calendar, and isn't reported in the news.--the "phantom forces" or "unseen hand" of bond market movement. This refers to considerations such as Auction concessions and trading the disruption of Verizon's massive corporate bond offering set to be priced today.
These are the sorts of things that have no inherent positive or negative bias (well, an auction concession tends to push yields higher, but who's to say the concession wasn't already being built in to prices/yields yesterday?). They also don't adhere to a calendar except inasmuch as Verizon's deal will ultimately be priced and the Treasury Auction will ultimately be done. Even then, we'll have the 30yr Auction tomorrow before the cycle is complete.
Fannie 4.0s are currently up 7 ticks at 102-13 and 10yr yields are down 2.2 bps on the day at 2.9439. Equities markets are almost dead flat since yesterday morning. What's that all about?!
Live Chat Featured Comments
Matthew Graham : "thank you. The answer (probably) to your curiosity, lies with the auction cycle (extra Treasury-specific supply to deal with), as well as the disruptions caused by the increasingly massive Verizon deal (where corporate bond markets would also be most likely to hedge with Treasury benchmarks vs MBS/other)."
Scott Rieke : "Sorry - the basis is the spread between MBS and Treasuries. It's the basis spread. UST and MBS don't trade tick for tick as well due to mismatched in durations. Basically what I'm saying is I'm surprised to see weakness in UST not entirely reflecting in MBS, particularly since MBS has traditionally (since May at least) been subject to over-reactions in sell-offs and sluggish in rallies."
Matthew Graham : "now you have to explain that in English for all the people you just confused"
Scott Rieke : "Surprised to see the basis holding as UST retrace here after wholesale numbers."
Scott Garner : "Most don't realize whey rates moved up and some actually think we'll see them drop back in the 3's again if they wait long enough. They're spoiled and dreaming."
Victor Burek : "I do agree that most consumers don't know where rates are..they think they are still in the 3's, and once they find out upper 4's many are pulling plug on buying"
Andrew Benson : "Anybody paid attention to the du refi plus changes in the 9.1 release notes? From my read, it looks like most du refi plus will be like fha streamline with respect to income -- document source of income or 12 months piti. exception being if P&I increases more than 20% or it is an HPML loan, then 620 fico 45 dti max. that's my read on it. agree?"
Jason Anker : "lets assume most fo the world refi'd already. I dont think consumers even know where rates are which does not explain the fall in Purch apps. where did they go"
Edgar : "Gm all....I'm sure it's been discussed in detai already but not surprised to see applications continue their collapse in Sept. As I said mid summer you'll start to see the data turn in Sept/Oct. I think the Fed tapers next week, small amount and leaves MBS alone. A surprise twist could be some verbiage from the Fed about how MBS will not be touched for a long time and/or a slight increase in MBS purchases. Highly doubt it but you never know."
Jason Anker : "no confirmation yet, they can keep sellign to FNMA till mid/late 14 so this may take a while to play out. they also sell some of their own MBS's without FNMA so maybe thats their plan... tbd"
Matt Hodges : "will that continue after 9.1 released, Jason?"
Jason Anker : "our state housing does 97 with no MI at very good rates and they sell the paper to FNMA mostly. Will not be good for our 1st time market here "
Ted Rood : "We haven't done a ton of them, usually go 95% for better pricing and MI rates."
Scott Garner : "I remember when it was like 3.38% up front MIP so I'm sure we're at least headed back to that."
Ira Selwin : "Would be interested to see the stats on the usage of the 97% product."
Ted Rood : "Change MIP to 5%, just so it's a round number?"
Scott Garner : "Not sure about your markets but mine will be hurt by DU 9.1 due to the elimination of 97% LTV. Will be interesting to see if FHA makes another move to slow down the flow of biz that will surely come their way due to this change."
Matthew Graham : "RTRS- U.S. JULY WHOLESALE SALES +0.1 PCT (CONSENSUS +0.4 PCT) VS JUNE +0.4 PCT (PREV +0.4 PCT) "
Matthew Graham : "RTRS- U.S. JULY WHOLESALE INVENTORIES +0.1 PCT (CONSENSUS +0.3 PCT) VS JUNE -0.2 PCT (PREV -0.2 PCT) "
Jeff Anderson : "More fun facts? I heard right before the great depression the 10 year moved 30%+ in a short time. We've moved what, 60%+ in 4 months?"
John Rodgers : "very similar move as 2008 but in the wrong direction"
Scott Garner : "Lehman filed for BK on 9/15/08 if that gives you some perspective on where things were the last time the index was that low."
Jason Anker : "wow - am i correct in thinking that was the level prior to QE1 and rates were in the 6's?"
Scott Garner : "Index of mortgage app activity lowest since 11/2008. Doesn't appear that a 1% rise in rates has had much impact on loan apps . . . NOT."
Jason Anker : "i think ted is right, small change that most likely wont impact anything but its out there"
Ted Rood : "99% sure 7 and 10's qualify on note rate now."
Scott Valins : "isn't that no change to current guidelines?"
Ira Selwin : "Correct"
Andy Pada : "and 5YR and fewer ARMS to be qualified at the greater of fully indexed rate or Note rate plus 2%."
Andy Pada : "I read the updated DU 9.1 update and it requires 7 and 10 YR ARMS to be qualified at the higher of the fully indexed rate or note rate. Anyone else confirm this?"