Another day in August and another sell-off for bond markets. This one was particularly large, high-volume, and high frustration. Things got off to a fast-paced start in the overnight session and never recovered despite typically bond-market-friendly economic data, thus the frustration. This isn't that big of a leap considering the recent harping on the topic of not trying to stand in the way of a technical/trade-flow-driven market movement with objections based in market fundamentals. In that sense, we'd hope we can look forward to a day in the near future where the technically driven movements run their course and things start to make more sense. The charts below are dedicated to that possibility. They simply show how 10yr yields have moved sharply away from recent trends, but without participation from the Euro, fell back in line. The second part of the chart accounts for some of the natural counterpoint to this that the Euro isn't supposed to trade in lock-step with Treasuries in the first place. It shows US 10's vs German Bunds and even there we see US Treasuries would only be back in the mid 1.6's today if the same correlations were maintained. This big implied risk to all this well-wishing is that the hopes of QE3 are so diminished that US Treasuries are gapping out vs their European counterpart. This would, in fact, basically get us to current levels, even though we hope for something more "March-like" as seen in the charts below.
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 4:04 PM EST
Afternoon Reprice Alerts and Updates
Below is a recap of instant Reprice Alerts
and updates issued via email and text alert to MBS Live subscribers
Fannie 3.0's Revisit Session Lows In Low, Late-Day Volume
Fannie 3.0's are feeling the pain today, coping both with the overall bond market sell-off as well as their riskier spot on the MBS curve. As they afternoon leaks weaker, they're taking the most damage, down to session lows just over 102-02.
We've seen our fair share of negative reprices for the day, and this late-day weakness keeps those risks on the table, and increasingly so if we fall further from here.
In terms of broader markets, 10's are still hovering just over 1.80%, not demonstrating the same sort of directional weakness as MBS.
Gangster's Paradise Remix: Trader's Paradise
Sell-off's are no fun. As we've often discussed, it's hard not to let the direction of the line on the MBS chart suggest the direction of our moods. So hopefully this flashback to this piece from August 2009 (slightly modernized) helps lighten the mood somewhat (note: if you're not familiar with the original "Gangster's Paradise," this loses some of it's awesome. Otherwise, enjoy):
As I see no more rallies for the MBS
I take a look at my pipe
And realize there's nothing left.
'Cause I've been floating with positions so long
That even my momma thinks that old locks are blown.
But I ain't never floated deals, that didn't deserve it.
Massive Sell-Off overnight?, you know that's unheard of!
You betta watch how ya tradin'
What snowball sellin' you fadin'
Or the self-appointed gurus won't have room to talk.
I really hate the spread but I gotta lock,
As prices fall like rocks, I see myself in line for docs.
Fool, I'm the kinda LO all you fellows wanna be like,
Hedged my pipe in the night
Saying thanks MBS Live!
We've been spending most July living in a trader's paradise...
We've been spending most our time living in a trader's paradise...
Look at the situation, disconnected tradin'
I can't put out a decent quote, they keep raising my rates!
So I gotta be down with MND
Too much CNBC watchin', got me chasing dreams.
I'm an educated LO with rebate on my mind
But even three eighths in my hand makes a gleam in my eye.
I'm all locked up bankers! I'm out of danger!
And my LO's got lock sheets so don't arouse my anger.
Fool, another Provi reprice ain't but a day trade away,
Instead of living life do or die, I'll live to lock another day!
I'm at 3 seven five now, will I live to see 3 seven fo'?
The way traders tradin' I don't know.
Tell me why do we
chase more Y - S - P.
When the ones who win
Trade on Wall Street?
Just spent most of July Livin' in a Trader's Paradise
Old-Fashioned Snowball Sell-Off Gaining Mass And Momentum
Looking to be about time for panic as bond market have taken on their own mass and momentum. Volume is surging, yields are climbing. Stops are getting triggered leading to lower prices and more stops getting triggered. This is compounded by new shorts entering the market as well and lower coupon MBS getting scared of being "left on the island" if rates adjust slightly higher (extension risk).
We've already seen an early batch of negative reprices and at current levels (down another 4 ticks from there and 10yr yields up over 1.80), it's fair to expect more.
German EconMin - ECB bond buys must be matched by reforms
***We highlight the following article from Reuters not because Germany is being restrictive but rather because there's been a shift in the restrictive tone in recent weeks. We've gone from a sternly shouted: "NEIN!" to Bundesbank president merely "having reservations." Again, ECB bond buying doesn't "fix" the Euro zone, but if it reduces periphery funding costs, it can at least soften what previously looked to be a fairly brutal crash landing. ***
(Reuters) - Any purchase of bonds from countries such as Spain and Italy by the European Central Bank must be linked to clear commitments to structural reform and budget discipline, German Economy Minister Philipp Roesler told Reuters on Wednesday.
Roesler, head of the Free Democrats (FDP) who share power with Chancellor Angela Merkel's conservatives, also said the euro must not be allowed to fail due to a lack of effort by countries at the frontline of the euro zone debt crisis to overhaul their economies.
"(ECB President Mario) Draghi has himself emphasised that bond purchases can never replace structural reforms and budget discipline. We take him at his word. That is the right road to follow," Roesler, whose FDP has been more sceptical about bailouts than Merkel's Christian Democrats (CDU), said in an interview.
Draghi signalled earlier this month that the ECB may start buying government debt to reduce crippling Spanish and Italian borrowing costs but he also said any intervention would only come if governments requested euro zone aid first. That in turn would be linked to conditions.
Many Germans, including Bundesbank chief Jens Weidmann, have major reservations about a new bond-buying programme, fearing it would reduce the pressure on governments to cut debt and make their economies more competitive.
Negative Reprices Streaming In Already.
Several reports of negative reprices already this morning as Fannie 3.0s saw a somewhat abrupt adjustment from 102-15 / 102-18 range down to 102-10 currently. These are earlier than normal and on less movement than has recently justified negative reprices. MBS and Treasuries both appear to have leveled-off since the 10am hour, but the simple existence of these seemingly unjustified reprices hearkens the possibility of more. Stay frosty. Panic is in the air.
Live Chat Featured Comments
Rob Clark : "REPRICE: 3:37 PM - Provident Funding Worse"
Caroline Roy : "hmm. most things closing short term are locked but the 30 days out pack is floating, or drowning, which ever way you look at it...."
Matthew Graham : "Historically, there's a 2-4 week period following the recent trends we see more sideways action than a bounce back lower in rate"
Ira Selwin : "REPRICE: 3:33 PM - Franklin American Worse"
Ira Selwin : "REPRICE: 3:33 PM - Franklin American Worse"
Caroline Roy : "i seriously had a nightmare about a facemelter day like this. i was sitting at my desk in the dream and the market was just selling off like crazy. MG, what are your two cents on this? reversal in sight? or am i screwed on my loans that aren't locked?"
Rob Clark : "Santelli and some other dude on CNBC said they expect treasury yields to drop again since this run up makes no sense."
roland.wilcox : "REPRICE: 1:45 PM - USBank Worse"
Victor Burek : "REPRICE: 1:38 PM - Nexbank Worse"
Michael Owens : "REPRICE: 1:37 PM - NYCB Worse"
Michael Owens : "REPRICE: 1:37 PM - MSI Worse"
Dustin McAlister : "REPRICE: 1:18 PM - Suntrust Worse"
Grant R. Menard : "Matt has it right :)"
Christopher Stevens : "MH- one of my LO's and I were laughing last night at the fact we are hearing clients complain at a rate of 3.625%"
Matt Hodges : "listen - i've been doing this for 14 years and i love the mortgage business. I've sold 9% and I've sold sub 3%. Right now looks ominous, but the rates are fantastic. Get out, call on past clients - lock em or float em, but get to the before someone else does. End of Sermon"
Christopher Stevens : "Be interesting to see if it holds 1.80 "
Gus Floropoulos : "from a technical standpoint, its bad enough the actual yield is crossing the 50, 100 dma, whats worse is when the 50 dma crosses the 100 dma, and so on....."
Jason Adams : "REPRICE: 12:47 PM - Flagstar Worse"
Matthew Graham : "doesn't mean it holds like a brick ceiling, but hasn't technically been broken"
Matthew Graham : "actually, we're just at the upper white line: http://tinyurl.com/99zzes9"
Christopher Stevens : "MG- you showed a chart a few days ago with 10YR lines at 1.55, 1.63 and 1.69 for ceilings to watch for. Now that we have broken through those as well as 1.79 what are the next technical levels?"
Christopher Stevens : "REPRICE: 12:18 PM - Wells Fargo Worse"
Michael Kelleher : "we have to go up in order to go down is my thinking and the job market and retail sales beat market estimates but that doesn't mean they were great numbers, rent is going up, many people are living at 40% dti back end or higher, we will be fine, it just helps when technicals back up my optimism"
Adam Quinones : "swap spreads are a moving wider"
Adam Quinones : "open interest is up in 10yr futures in high-volume...that indicates short selling. "
Adam Quinones : "volume is huge in 10yr cash--"
Matthew Graham : "re: technical analysis stuff, 10's opened over the 100day moving average for the first time since March. It's getting uglier. "
Grant R. Menard : "yes Andy. Happens offten actually"
Andy Pada : "has anyone else had issues with LP changing the HVE values with each submission?"
Ray J : "floating - agreed. any technical analysis chart stuff in the works?"
Jack Shotbolt : "Jobless Claims tomorrow will allow us to start re-tracing. I say float today."
Ira Selwin : "REPRICE: 11:32 AM - Chase Worse"
Ira Selwin : "Those re-prices are correct"
Christopher Stevens : "MG- do you think this selling is based more on computer programs being triggered by technical levels being reached "
Ken Crute : "to slow down panic locks? "
Victor Burek : "these lenders issued rate sheets this morning, and our repricing worse?"
Kunal Khanna : "REPRICE: 11:24 AM - Caliber Funding Worse"
Gus Floropoulos : "REPRICE: 11:20 AM - PHH Worse"
Jeff Anderson : "REPRICE: 11:13 AM - GMAC Worse"