GDP was stronger than expected this morning, yet bond markets are in stronger territory. Volume in MBS is light, but they're just following Treasury cues anyway. Volume in Treasuries is not nearly as light as we expected for this Friday before the week of Christmas, so it's insufficient to simply chalk the move up to randomness. What gives?
In short, tradeflow considerations
are outweighing any impact from the data. FOMC, in and of itself, makes for a lot of "position" setting and closing--that is, traders making or covering various bets on what will happen before and after FOMC. Then there's "year end," which also draws out a lot of position-squaring. The confluence of these events has made for an environment where traders' positioning
is more relevant
than the data. This is especially true yesterday and today where no one can read anything into the data as potentially affecting the FOMC outcome (because it happened 2 days ago).
These "bets" don't necessarily have to be as simple as "higher rates vs lower rates." More often than not, Treasury trading is focused on "curve trades" where one part of the curve would be sold to buy another. In that way, you don't have to predict where rates will go--simply how longer term rates will fare against shorter term rates. In the current case, the long end of the yield curve had been aggressively sold relative to the middle (or "belly") into the end of November (meaning 5's were doing better than 10's).
That position had been unwinding heading into FOMC, but looked like it might be reinvigorated after the Announcement. It wasn't, and it has been going firmly in the same direction ever since. This can be seen today with the longer duration Treasuries in the green and shorter durations in the red. Fortunately, MBS tend to run with the longer end.
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 11:07 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
Bond Markets Shrugging Off Stronger GDP; MBS at Best Levels
Fannie 4.0s are back into positive territory, up 2 ticks at 103-02 after having fallen to 102-21 on this morning's GDP data. Treasuries moved up to new 3-month intraday highs of 2.966 briefly and are now back down to 2.911.
While GDP was stronger than expected, a few things have worked in our favor since the data. First, as is always the case with GDP, it speaks to stale data. That doesn't make it irrelevant, but less of a market mover than its household name status suggests.
Then there's the matter of holiday volume and tradeflows. Volume is, of course, lighter than usual into the second half of December, and today is no exception. That means that any positional biases (traders being predisposed to make certain trades regardless of data and events) have a bigger-than-normal effect.
Once Treasuries hit the 2.96's for the second time this morning and held their ground, the trading positions that were betting on a steeper yield curve (2-3yr lower in yield and 10-30yr higher) had an opportunity to continue unwinding (i.e. trading in the other direction--in this case higher 2-3yr yields and lower 10-30yr yields).
This quickly drew out a big block trade at 9:19am in 10yr futures and a 30yr bond block trade at 9:22am. That helped the momentum continue running in a positive direction for MBS, with the lower Treasury yields prompting "short-covering" as well (traders who had been betting on higher rates being forced in to 'cover' those trades as they become less profitable).
All of the above has run its course for now and we're waiting on the next move. Volume is that much lower now vs 9-930am, making tradeflow and positional considerations all the more likely to motivate any movement.
ECON: GDP Rises Above 4 pct, Much Higher Than Expected
- Final GDP +4.1 vs +3.6 forecast
- Biggest gain since Q4 2011
- Consumer Spending +2.0 vs +1.4 previously
- No major change in Business Inventories
- Market Reaction: MBS and Treasuries only moderately weaker. Fairly resilient so far actually.
Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 4.1 percent in the third quarter of 2013 (that
is, from the second quarter to the third quarter), according to the "third" estimate released by the Bureau
of Economic Analysis. In the second quarter, real GDP increased 2.5 percent.
The GDP estimate released today is based on more complete source data than were available for
the "second" estimate issued on December 5, 2103. In the second estimate, the increase in real GDP was
3.6 percent (see "Revisions" on page 3). With this third estimate for the third quarter, increases in
personal consumption expenditures (PCE) and in nonresidential fixed investment were larger than
The increase in real GDP in the third quarter primarily reflected positive contributions from
private inventory investment, PCE, nonresidential fixed investment, exports, residential fixed
investment, and state and local government spending that were partly offset by a negative contribution
from federal government spending. Imports, which are a subtraction in the calculation of GDP,
The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in
private inventory investment, a deceleration in imports, and accelerations in state and local government
spending and in PCE that were partly offset by a deceleration in exports.
Live Chat Featured Comments
Jeff Anderson : "Was thinking the same a few mins ago, Chip. Not terrible, yet."
Chip Hooker : "I don't know about the rest of you, but I'm really happy at the stability of rates right now, a wave of incredibly strong data, a taper and we are still below 3.00...seems like the market has digested nicely"
Jeff Anderson : "The CEO of Re/max just said rates were at 4% still. She sounds like a this glass half full permanent bull."
Matthew Graham : "yeah, volume's pretty low and also, A) it was Q3 data and B) taper is here"
Hugh W. Page : "Crazy this final GDP number is 45% higher than the first estimate that came out for Q3 GDP. "
FPH : "Nice bounce? Low volume MG?"
Matthew Graham : "RTRS- US Q3 BUSINESS INVENTORY CHANGE ADDS 1.67 PERCENTAGE POINT TO GDP CHANGE "
Matthew Graham : "RTRS- US Q3 CONSUMER SPENDING +2.0 PCT (PREV +1.4 PCT); DURABLES +7.9 PCT (PREV +7.7 PCT) "
Matthew Graham : "RTRS- US FINAL Q3 GDP +4.1 PCT, BIGGEST RISE SINCE Q4 2011 (CONSENSUS +3.6 PCT), PREV +3.6 PCT; FINAL SALES +2.5 PCT (CONS +1.9 PCT), PREV +1.9 PCT "