Both MBS and Treasuries started the day in good shape as a bout of universally downbeat data washed over the Eurozone. Speculation for some measure of central bank action at next week's meeting (European Central Bank, to be clear) also helped. German Bunds ended up trading briefly under 0.90%.
As the day progressed, Treasuries began to outperform MBS noticeably. This was especially apparent when 10's made new lows heading into 3pm while MBS continued bumping their heads on a ceiling at 102-27. One of the updates on MBS Live devotes more time talking about this underperformance. Here's an excerpt:
Long story short, MBS were less attractive at the spread levels achieved this morning. On top of that, we seem to have some organic resistance at 102-27 in Fannie 3.5s. This has been an absolutely epic inflection point in 2013 and 2014. With the exception of the few days at end of May 2014, we haven't closed above 102-27 since before the wild ride after the Fed Announcement in June 2013.
Ancillary factors in the Treasury outperformance include the shape of the yield curve today, in that 30yr bonds are crushing 2yr Notes. Basically, the longer the maturity, the better it's performing today, and the estimated maturity for MBS equates to something slightly less than 10 years. If we were to compare MBS to 5yr Treasuries, the fight would be more fair today.
Bottom line, Fannie 3.5s are blatantly refusing to break above 102-27. They're not losing any meaningful ground, but they're certainly not interested in following the late day Treasury rally. There's really no implication to any of this. It's only offered by way of explanation for something that may otherwise be counterintuitive.
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