It's been a nice, straightforward morning for bond markets. Data was much weaker than expected and bonds rallied as a result.
That said, it's not unfair to wonder why the rally isn't even bigger considering the size of the 'miss' in GDP (-2.9 vs -1.8 forecast) and in Durable Goods (-1.0 vs 0.0 forecast).
There are three potential reasons. First, bond market trading levels were already at the edge of the range before the data. That means any further gains are pressing into new territory ("new" relative to the June 3rd - June 24th range). If we consider that 3pm closing levels are the most important in suggesting a range break, market participants are still in the process of deciding if this is the data that justifies the break.
Second, GDP is backward looking (naturally, since it refers to Q1 which was January-March). Some discount this period due to the weather impact, but there are also considerations surrounding inventory fluctuations and Affordable Care Act accounting. Beyond all that, the lower Q1 is, the higher Q2 becomes, all things being equal.
Finally, Durable Goods is a fairly cyclical report. That's not to say that a big miss doesn't matter, but the headline isn't the full story. Much like there are reports on inflation with markets tending to care more about "core inflation," there is also a core component of Durable Goods (though it's not called that). The "Nondefense, excluding aircraft" component is effectively the core reading for Durable Goods and it was +0.7 vs +0.5 forecast--much more palatable.
All told, the rally makes sense, and the hesitation to take it any further makes sense as well. 10yr yields are fighting to stay under 2.545. They've been doing a good job so far, but there have been a lot of tests/bounces. Fannie 3.5s are underperforming, but still roughly a quarter point up, fighting to hold 102-20.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing
is available via MBS Live.
| MBS || |
98-16 : +0-08
102-21 : +0-07
105-28 : +0-05
| Treasuries || |
0.4803 : +0.0163
2.5394 : -0.0466
3.3682 : -0.0388
| Pricing as of 6/25/14 11:56AMEST |
Morning Reprice Alerts and Updates
8:55AM : Bond Markets Much Stronger after GDP, Durables
Live Chat Featured Comments
Christopher Stevens : "IMO rates would need to dip below 3.875 to get refi's back on the table but that would mean economy is even worse so jobs won't be there and purchases drop. Rates increase refi's are gone and hopefully purchases pick up as people gain jobs and feel more comfortable they will keep their job. A precarious economic situation indeed. "
Christopher Stevens : "10yr hitting lowest level of June"
Victor Burek : "Bloomberg just said this report doesn't tell us where we are going, but how bad the winter was.."
Matthew Graham : "RTRS- US MAY DURABLES ORDERS -1.0 PCT (CONSENSUS UNCHANGED) VS APRIL +0.8 PCT (PREV +0.6 PCT)"
Matthew Graham : "RTRS- US Q1 BUSINESS INVENTORY CHANGE CUTS 1.70 PERCENTAGE POINT FROM GDP CHANGE"
Matthew Graham : "RTRS - US FINAL Q1 GDP DEFLATOR +1.3 PCT (CONS +1.3 PCT), PREV +1.3 PCT"
Matthew Graham : "RTRS- US Q1 CONSUMER SPENDING +1.0 PCT, WEAKEST READING SINCE Q4 2009 (PREV +3.1 PCT); DURABLES +1.2 PCT (PREV +1.4 PCT)"
Matthew Graham : "RTRS- US FINAL Q1 GDP -2.9 PCT, LARGEST DROP SINCE Q1 2009 (CONSENSUS -1.7 PCT), PREV -1.0 PCT; FINAL SALES -1.3 PCT (CONS..UNCHANGED), PREV +0.6 PCT"
Victor Burek : "based on last quarter...aren't expectations for close to 3% for year? which means we need over 4% gdp next 3 quarters to get any where close"
Christopher Stevens : "Huge Q2 GDP based on last quarter or historically"
Victor Burek : "probably not, but with expectations of a huge q2 gdp, seems durable orders should have a higher expectation"
Christopher Stevens : "Even if GDP revised down to -1.8 will market care? It's a backward looking number. "
Victor Burek : "bar set pretty low, even though economists expect a huge q2 gdp"
John Sheadel : "Durable goods forecast at nothing, and nondefense, ex-air higher than the actual total durable number... this should be interesting. "