MBS RECAP: 2 Days of Debt Deals, 2 Different Reactions from Bonds... Why?
Somehow, the same debt deal (or similar anyway) that caused problems for bond markets yesterday, ended up being the leading suspect behind a solid rally today. There are several potential explanations for this paradoxical behavior. The simplest among them is that today's iteration of the debt deal was the "most real." In other words, on Monday, when Treasury futures took a dive after the first Senate-drafted deal was announced, we didn't have any sort of confirmation from the House that the bill was passable. Today we do.
Not only did Ted Cruz promise not to read
any more Dr. Suess books, but later in the day, John Boehner said that House Republicans wouldn't try to block the deal either. The short term funding market--which had been increasingly been seizing up--thawed quickly today. That's something we did not have
in the past two days, and cheaper short term cash paves the way for lending long term cash.
Technical levels tradeflow considerations came into play as well. Traders who shifted to bullish bets (meaning they were rooting for lower rates) were forced to sell when 10's rose over 2.724. Forced selling ran it's course just in time for the Fed's scheduled buying operation in Treasuries today, and in retrospect, this was the agreed-upon turning point of the day among traders. As bond markets improved, those with open bets on rates moving higher were forced to cover those bets by becoming buyers ("short-covering").
Bottom line: thawing funding markets + technical support at 2.75% in 10yr yields (bouncy ceiling, hopefully) + short covering = nice-sized bond market rally. It was just enough to get MBS back to levels from Wednesday morning last week. Notably, 10yr yields are still on the edge of what we'd considered to be their narrow sideways range during the first week and a half of October. We'll likely know whether or not this will act as resistance after Congress passes the debt deal (supposedly tonight).
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 4:09 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
Holding Gains After Beige Book; Positive Reprices
The just-released Beige Book was sort of a let-down in terms of offering any sensational insight regarding the effects of the government shutdown on the economy. If you're interested in devoting a portion of your life to reading it
, you'll find that most respondents in most districts referenced the possibility of a "protracted shutdown" having more of an effect on their corner of the economy, but that no major ill effects were yet present. Most noted that they'd generally be bouncing back if the shutdown ended soon.
Quantifying "soon" is a bit of a challenge considering the last day of data collection was October 7th. We can't really know how the respondents would feel today, on the 16th, but as long as we told them the shutdown might be ending tomorrow morning, the existing data suggests they'd probably be mostly OK with it.
That's a net negative, as far as bond market implications are concerned, but today it must be balanced against the short-term euphoria of short-term funding markets coming back online in response to the potential debt deal--not to mention the technical and tradeflow-based snowball rally that began at 11am.
While bond markets have indeed done more to level off since 2pm, that seems to be less about the Beige Book and more about the big gluts of activity coming earlier in the day, coinciding with debt deal headlines and technical stops ("stops' meaning traders' predetermined lines in the sand that, if crossed, force the exit of a position, aka "forced buying").
Whatever the case, we sit well above yesterday's highest MBS prices at this point with Fannie 3.5's up 13 ticks at 101-09. Many lenders have repriced positively--some twice--and more may get on board as current levels are maintained. The House and Senate are expected to have passed a debt deal by tonight.
MBS Hit 2-day Highs after Debt Deal Announcement (No Vote Yet)
While we have yet to see a House vote on the Senate-drafted debt deal, we do have a White House press briefing happening in moments where Jay Carney is expected to discuss the debt ceiling agreement. This follows Ted Cruz saying he doesn't plan to block the deal.
Bond markets have improved steadily since 11am and tradeflow momentum was a factor in the positivity. 2.75% remains a potentially supportive level for 10yr yields, but there's no clear correlation between the passage of the debt-ceiling bill and a bond market rally or sell-off. A case could be made for either.
All we can know for now is that prices are higher and yields are lower. 10's are finally into positive territory on the day at 2.7056 and Fannie 3.5s are up 5 ticks at 101-01. We've seen a few positive reprices so far and more are possible while we remain around these levels.
MBS Head into Positive Territory after Fed Buying Operation
Both Treasuries and MBS have had strong positive moves just after 11am. That's usually a clue that the Fed's daily bond buying operation is a factor and the relative volume between stocks and bonds confirms that's the case today.
While that's enough for a seemingly precipitous adjustment to trading levels, it's not the sort of thing that creates lasting momentum. True to that form, we're already seeing resistance kick in with 10yr yields still slightly higher on the day at 2.73. Fannie 3.5s are up 2 ticks on the day at 100-30 and also pausing for reflection.
In general, markets are waiting for the outcome of the House's return from recess at noon. Although we don't know how long after that it would be before it happens, they are expected to vote on and pass the most recent Senate-drafted debt ceiling bill.
Live Chat Featured Comments
Sung Kim : "i am still confused - it's still not clear cut if a deal is finalzied that we continue to rally or sell off"
Nathan Stotlar : "Given the situation, wouldn't MBS be "safer" than TSY with the default looming?"
Andrew Horowitz : "would you have bought bonds in the past 3 weeks Sung?"
Sung Kim : "does this move imply that a deal is actually good for us?"
Sung Kim : "mbs/tsy movement is confusing me"
Matthew Graham : "data collection on or before 10/7, so it doesn't capture everything"
Ted Rood : "Wait a minute, I thought shutdown brought economy to a screeching halt! Heard that from all the pundits."
Matthew Graham : "RTRS- FED SAYS BUSINESS SPENDING AND PAYROLLS GREW IN MANY DISTRICTS, EMPLOYMENT GROWTH REMAINED MODEST IN SEPTEMBER -BEIGE BOOK"
Matthew Graham : "RTRS- FED SAYS BUSINESS CONTACTS CAUTIOUSLY OPTIMISTIC ON OUTLOOK BUT GOVT SHUTDOWN, DEBT CEILING HAD INCREASED UNCERTAINTY "
Matthew Graham : "RTRS- HOUSE,SENATE EXPECTED TO APPROVE FISCAL DEAL LATER WEDNESDAY, CLEARING WAY FOR OBAMA TO SIGN IT INTO LAW BEFORE THURSDAY'S DEADLINE - SENIOR AIDES "
Morgan Hammer : "hope we can get back most of what was lost in the past 4 days. I see about .75 worse from Thursdays pricing "
Andrew Horowitz : "pent up demand CS"
Andrew Horowitz : "guess passing the resolution and avoiding the default is leading to a rally, "
Christopher Stevens : "wasn't anticipating this reaction in the 10YR today"
Dennis Oleesky NMLS #448519 : "Jason they are buying up the market but you wont fund until 2014"
Jason York : "does anyone know if BOA retail has good conventional rates?"
Matthew Graham : "RTRS- US HOUSE REPUBLICANS TO HOLD PRIVATE MEETING AT 3 PM ET (1900 GMT) TO DISCUSS SENATE'S FISCAL DEAL "