The morning has seen rapid swings between highs and lows for stocks, bonds, MBS, and just about everything else. As expected, the logical impact from economic data fell by the wayside and markets instead focus on Ukraine-related headlines. In one of the updates on MBS Live this morning, I went into greater detail about counterintuitive market movements in this environment. MBS Live members will have already seen this, but as a courtesy to non-members on this relatively confusing day, here's the full text:
UPDATE: Why are Bond Markets Losing Ground This Morning? Update Issued: 3/14/2014 10:46 AM
A few questions have come up as to why bond markets are losing ground this morning, especially after weaker Consumer Sentiment data. (NOTE: Treasuries are still in positive territory on the day, and MBS are close to unchanged. This discussion is more about why we might see serendipitous movements that don't necessarily align with default expectations based on incoming data or lack thereof).
It's important to keep in mind that most of current movement in financial markets is being driven NOT by economic fundamentals or any other factors external to the market. Rather, in geopolitical risk situations, markets trade on the observation of what other market participants are doing. It only takes a small amount of reaction to a particular headline to motivate organic movement, and from there, it's simply "herd mentality."
If a few head of cattle see a nice patch of grass and walk quickly toward it, some of the others who don't see the grass may start following simply because "if those other cows are moving over there quickly, there must be a reason, and since I'm a cow too, what's good for them is probably good for me. Wait up guys!"
Normally, our little herd would be spread out enough to see their own patches of grass for themselves and make their own culinary decisions. But the geopolitical risk climate tends to bring the herd closer together. None of the folks pushing buttons at trade desks are experts on Russia/Ukraine relations. At times like this, there's less impetus to be opportunistic. It's safer for any given cow to stick with the herd until she can get a more normal view of the landscape.
All that to say: "anything can happen" when it comes to big geopolitically-driven rallies or sell-offs. If stocks happen to bounce at a particular level for a particular reason, all Treasuries (and by extension, MBS) care about is that another big market sector bounced. If German Bunds are bouncing in the same direction (moving away from panic), Treasuries are most likely to move in the same direction in this environment.
On a final note, keep in mind that the current rally in bond markets is built on straw. While it's true that some straw houses can be pretty darn nice, they rely on cooperation from the weather if they hope to last very long. Remember that Ukraine headlines combined with month-end positivity in February to take bonds into unexpectedly strong territory. After that, they returned to the same mild, higher-in-rate trajectory seen in mid-February. It was only by virtue of yesterday's flare up in headline risk that bonds returned to the late February range.
In other words, the natural tendency would be to gravitate toward that higher-in-rate range in the absence of the Ukraine situation. Bond markets have to muster a certain amount of extra energy to constantly be fighting the effects of that gravity, and they can only do it for so long unless fundamentals help out, and we'll be waiting at least until next week for that possibility.
Bond markets are also cognizant of the possibility that fundamentals could suggest more economic positivity than expected, or more of a move away from the weather-related drag in January. If such a thing happens to coincide with a 2nd phase of cooling tensions in the Ukraine, things could get very challenging very quickly for rates. That's not to say they WILL get challenging (tensions could just as easily flare hotter and econ data could be crappy), but it's a risk to be aware of.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
| MBS || |
96-32 : -0-04
101-05 : -0-03
104-14 : -0-03
| Treasuries || |
0.3464 : +0.0044
2.6525 : +-0.0005
3.5915 : -0.0095
| Pricing as of 3/14/14 12:20PMEST |
Morning Reprice Alerts and Updates
12:04PM : ALERT ISSUED: Swinging Right Back in the Other Direction! (Negative Reprice Risk is Back)
11:20AM : Reprice Risk Ebbs as Bonds Bounce Back
10:46AM : Why are Bond Markets Losing Ground This Morning?
10:06AM : ALERT ISSUED: Bond Markets Weaker before and after Sentiment Data;Negative Reprice Risk Increasing
9:12AM : Stronger Open on Putin 'Invasion' Wire, met with Resistance
Live Chat Featured Comments
John Sheadel : "Thoughts as to gains we'll see today?"
Victor Burek : "depends on headlines"
Victor Burek : "I say flat day, unless action heats up in Ukraine or calm develops and we could sell off"
John Sheadel : "As the vote isn't until Sunday, I can't see anything selling off until next week. But I've been wrong before. "
Matthew Graham : "RTRS - U.S. FEB PPI FOR FINAL DEMAND -0.1 PCT VS JAN +0.20 PCT USPPFD=ECI"
Hugh W. Page : "So many wild cards out there to affect yields in either direction. Just glad my MBS Live screen is front and center to help me navigate clients through the jungle."
Matthew Graham : "RTRS- THOMSON REUTERS/U. OF MICH US CONSUMER SENTIMENT INDEX PRELIMINARY MARCH 79.9 (CONSENSUS 82.0) VS FINAL FEBRUARY 81.6"
Matthew Graham : "THOMSON REUTERS/U. OF MICH CURRENT CONDITIONS INDEX PRELIM MARCH 96.1 (CONSENSUS 95.8) VS FINAL FEB 95.4"
Matt Hodges : "mixed results"
William McGuirt : "why are we in the red"
Matthew Graham : "Because bond markets are straddling unchanged levels and MBS are slightly underperforming."
Hugh W. Page : "position squaring for the weekend festivities?"
Matt Hodges : "and its friday and crimea may calm over the weekend"
Matthew Graham : "remember, this rally is built on a temporary foundation"
Matt Hodges : "do NOT apply logic to our pricing"
Hugh W. Page : "My logic on pricing extends as far as MG's latest daily chart"
Matthew Graham : "Really useful update just now (i hope) for anyone looking for more discussion on why bond markets are doing [this thing that surprises you] recently, and especially this morning."
Michael Gillani : "Excellent read in the most recent update MG!"
Matt Hodges : "that piece nailed it MG - very well written"