Bond markets had a great day today, but the greatness isn't entirely logical (ironic headline choice this AM, no?). While there was some economic data supporting the rally--namely Jobless Claims and Construction Spending--other data suggested the opposite move. Incomes/Outlays were stronger and ISM Manufacturing was no weaker than forecast.
If we want to look at the nice spike higher for MBS right after the 10am ISM data, and do so in the context of 'logic' and the overall economic data landscape, here's how we do it:
Weaker GDP dominated yesterday's trade and kicked off a bit of a chain reaction among accounts being forced in to buy bonds in order to close out previous short-selling bets (aka "short covering"). That made for a good amount of strength yesterday, but not as much as a normal pre-NFP snowball rally. It's possible--given the gravity of the ISM data--that the 'shorts' were waiting for 10am, JUST in case ISM came in stronger than expected, in order to have a slightly more advantageous price when it came to to cover shorts ahead of NFP.
In other words, if I'm short interest rates 2 weeks ago, I say "OK, the 10yr is near 2.6 at a price of 101-10. I'm selling now at 101-10." That means that any time in the future, if I buy-back for less than 101-10, I make money.
Now... the range since mid April is SO damn narrow, that we were much closer to the lowest prices in that range yesterday morning, but found ourselves quickly approaching the highest prices after GDP. The higher prices moved, the more motivation for short sellers to buy. The more short sellers buy, the more motivation for the next short seller to buy as the price continues going higher.
If I'm a short seller, I may well have been holding out for that ISM data as described above. That even would have made me a small profit up until 9:57am. There were probably many out there like me, and they were probably getting antsy as well. As soon as that data hit and was clearly not strong enough to motivate major selling in bonds, EVERYONE in my same position rushed for the buy button to close out their short position.
While we can't know if this explains all of today's surprising strength, it certainly accounts for some of it. Tomorrow is completely up to the data, as always, but here at the best levels of the recent range, there's no denying the overwhelming gut instinct that risk of a pull-back seems much larger than the prospects for a weak number to take us significantly lower in rate.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
| MBS || |
97-26 : +0-11
101-27 : +0-09
104-31 : +0-07
| Treasuries || |
0.4104 : -0.0076
2.6133 : -0.0347
3.4091 : -0.0489
| Pricing as of 5/1/14 4:03PMEST |
Today's Reprice Alerts and Updates
12:03PM : Snowball Buying and Positive Reprices
10:13AM : Bond Markets Improve After ISM and Construction Spending Data
9:00AM : Slightly Weaker Overnight, Holding Ground After Mixed Data
MBS Live Chat Highlights
Hugh W. Page : "Okay MNDers...tell me today is basically the 1 year anniversary of what?"
Clayton Sandy : "Last year's April Jobs report was the start and then on May 22 was when the "T" word came into play."
Hugh W. Page : "CS got it. 10 Yr basically 1% higher today then a year ago."
Sung Kim : "or people are coming to the realization of what GDP prints need to be in order for us to come close to what expectations were at the beginning of the year"
Sung Kim : "basically 25% higher than previous estimates each month"
Sung Kim : "and those are always fleeting... could make for a nasty day if we have a 250k print which is very well in the realm of possibility"
Matthew Graham : "best rates in weeks + NFP tomorrow. Doesn't seem like much of a debate."
Christopher Stevens : "the snap back from here could break your neck tomorrow"
Hugh W. Page : "no brainer really....."
Steve Chizmadia : "Agreed, Lock em if you've got em. I f we convincingly break below 2.6 tomorrow renegotiations should be available. "
Sung Kim : "well, the problem is that the past few months have seen the NFP ramp and that has been no where near the case this week, so to be the contrarian, it may very well continue tomorrow even with the big print"
Jeff Anderson : "Def, a good day to lock. NFP beats tomorrow the selling should be worse as they've been banking this week."
Sung Kim : "but each day has been a good day to lock only followed by a better day the next"
Sung Kim : "that is why i am baffled"
Matt Hodges : "baffled is one thing... NFP risk is another"
Matthew Graham : "Quite honestly, I do actually get a bit wary when something seems so obvious."