MBS Pricing Snapshot

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.

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.

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.