What's Up With Today's MBS Volatility?
MBS prices suffered from two infrequent sources of volatility today. The first was easier to pinpoint and understand as it resulted from the regularly-scheduled settlement process. In fact, this is really only optical volatility for reasons outlined in our primer on the roll. The other source of volatility was more confounding. The problem, in a word, was illiquidity (there's a primer for that too, incidentally). It results in huge moment-to-moment swings in bid prices but only one side of the swing is in line with actual trades. Fortunately, that was the higher end of the range this morning. Unfortunately, the entire bond market lost ground heading into the afternoon and several lenders ended up repricing for the worse.
Fed MBS Buying 10am, 11:30am, 1pm
Core Annual CPI 4.9 vs 4.9 f'cast, 4.6 prev
Consumer Sentiment 70.4 vs 67.1 f'cast
1yr and 5yr inflation both unchanged
Bonds were very slightly stronger right at the start of the overnight session, but yields moved modestly higher heading into European hours. Trading has been mixed since CPI data. 10yr yields are up less than 1bp at 1.506 and 2.5 UMBS are down just over an eighth of a point.
Steady gains into the noon hour and slightly weaker since then. Illiquidity returning and making MBS look weaker than they actually are. 2.5 coupons roughly unchanged now. 10yr yields down 3.2bps at 1.465.
PM weakness continues with MBS now down almost a quarter of a point from intraday highs. 10yr yield still down 1.5bps, but well off the lows at 1.482.