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MBS RECAP: After Econ Data, Bonds Smell Like September; Traders Bolt

The balance of this week's economic data was unequivocally "not enough" to remove the stench of September tapering from MBS and Treasuries.  It was all very mathematical really.  Each of the three days with something to offer in terms of econ data (Tue, Thu, Fri) got it's chance to make counterarguments against September tapering.  Not only did some of the reports argue FOR September, but those that didn't were fairly wishy-washy about it.  For instance, a print of 80.0 is not cutting it as far as raising alarm bells that the economy can't handle higher rates (see chart below).  The 'delayed reaction' contingent may end up having a point, but that's precisely why we've been talking about tapering for so long without actually doing it (so rates could rise without any material policy change, giving the Fed a chance to observe the effects of higher rates before further committing to them).  Bottom line, no moon shooting this week.  No one wants to catch the falling MBS/Treasury knife on a Friday ahead of a potentially thinly staffed week ahead. 



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 4:06 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 this afternoon.
3:02PM  :  ALERT ISSUED: Fast Money Back in Bonds With a Vengeance (Relatively)
This is getting to be a more frequent occurrence in the afternoon--where a combination of high-frequency-trading and other algorithmic trading programs are getting in and out of the market before key cut off times. In hindsight, we can see this happening from just before 1pm with exits just before 2pm. It's happening in reverse now with bonds getting bought heading into the 3pm close, and those day-trading bets are expected to be closing now with the market left to its own devices afterword.

That makes the 3pm-5pm hours a bit of wildcard as the program-buying can trigger other stops for the non-HFT players. It could even result in an extension of the gains. Whatever the case, we've now completely unwound the 1pm weakness with 10yr yields back to 2.82 and Fannie 4.0s back up to 102-17 from 102-10 lows (a mere 17 ticks lower on the day). A bold, fast lender might reprice positively here, but most would like to see this hold longer or move into better territory.

1:48PM  :  ALERT ISSUED: More Selling,More Reprices, Big Ones; George Jetson Casting Call
MBS/Treasuries: "Jane!!! Get me off this crazy thing!!!"

Jane: "No."

Casting director tells us that the role of the 'crazy thing' is most likely to be played by a really nasty Friday afternoon sell off, spanning bond and stock markets alike.

10's just broke HIGHER STILL, now up to 2.8619. MBS may be at 102-15 now, but there's no telling where that'll be in a few minutes. With each additional bout of selling, we hope to have seen the last of it, but the trend is the trend until it's not a trend anymore. This is a bad afternoon on a bad month in a bad era for bond markets.

12:47PM  :  ALERT ISSUED: MBS About to Get Hit Again. Reprice Risk is Extreme

There is no question that you'll see a fairly substantial negative reprice very soon if you haven't already. Either that, or the lender is asleep at the wheel. It's getting pretty nasty out in MBS land. Fannie 4.0s are at 102-20 now, but not for long.

12:15PM  :  ALERT ISSUED: Selling Getting Worse; More MBS Spillover; HIGH Reprice Risk
Negative reprice risk is incrementally higher now as the trend toward weaker prices continues. Fannie 4.0s are now down to 102-23 with buyers continuing to push a lower bid and sellers chasing the liquidity into the weekend. MBS weakness around 11:30 actually precipitated broader bond market weakness that reached Treasuries shortly thereafter. Treasuries have since taken the ball and ran with it, and now they're taking their ball and going home, as it were.

10's are up to 2.8178. Volumes picked up as we crossed into the noon hour. Sellers are getting out ahead of the weekend, and lunch-time is as good a time as any (liquidity is better in the AM hours, so sellers have a better chance of finding a buyer at their price).

Treasuries are definitely leading this second move and MBS are now finally following. Same liquidity dynamics in play. Further weakness is a risk. Negative reprices are a near certainty.

11:31AM  :  ALERT ISSUED: reprice risk increases as we move below 102-29

FNMA 4.0 coupon just broke 102-29 falling to 102-25 putting lenders in a position to reprice for the worse.

Live Chat Featured Comments

Matthew Graham  :  "TC, it's in the alert, but perhaps a bit "coded." There's no headline cause and effect, just bigger tradeflows coming through Treasuries. All it takes is one big trade bold enough to step out from the herd and the rest of the herd follows quickly. Dominoes and snowballs are other analogies that work, but this is what happens when tensions are high, markets are tentative, and traders are resigned to watching other trades for cues into a decreasingly liquid Friday afternoon (notably, the bigger"

Original author: Matthew Graham
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Sunday, 21 January 2018

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