MBS SPECIAL ALERT: Explaining The Surprise Mega Rally

This is an excellent article that sheds some light into all of the factors and complexities that affect and impact interest rates! There are so many factors at play and so much data and movement to track that can easily become overwhelming! I love this paragraph from the article

“Sometimes the clearly delineated scapegoat for these kinds of moves just doesn’t exist. I know that’s a tremendously unsatisfying answer in what seems like a world of mathematical decisions and correlations, but it happens. Think of it like a murder case with overwhelming circumstantial evidence yet no murder weapon. Most of the circumstantial evidence is listed above, but the case isn’t closed until tomorrow’s witness is called to the stand at 8:30am (meaning that NFP (Non Farm Payrolls) could either confirm everything that just happened, or reinforce the 2.04-2.07 pivot zone in 10’s. Looks like we’ll be up in the air until then, but not without tons and tons of positive reprices to consider beforehand).”

There is a lot of data to track and be aware when knowing how to price and lock mortgage loans! Make sure that you are working with a professional who has the resources and knowledge of the market to help you make the right decision when it comes to the biggest purchase you will ever make!

Jun 6 2013, 1:43PM
MBS Live: MBS Morning Market Summary

The morning has been intense in terms of the “unseen hand” causing massive market movements.  I talk a lot about “tradeflows and technicals” moving markets in the absence of scheduled data or major headlines, and today was an otherworldly example of just that.  This was written up in quite a bit more detail on the MBS Live dashboard, but the update didn’t make the cut-off time to be included in the regularly scheduled Mid-Day recap.  Normally, that would mean you’d have to wait for the RECAP at the end of the day, but we’re including it early today as it seems like the move in MBS needs some explanation.  Enjoy:

MBS LIVE UPDATE  10:42AM

Global Currency Implosion Slings MBS Through The Roof. Positive Reprices Galore

For a day that looked as if it was merely “to be endured” for weary bond markets ahead of NFP, it’s turned out to be the most significant rally of the week, nearly matching May 29th’s barn-burner. To make matters more interesting, there is no singular event to “blame” for the positivity (and as far as we’ve seen/heard it’s increasingly likely to end up being chalked up to team effort of factors)

Here’s a list of some of the potential factors with brief discussion to follow:

– Dollar/Yen reached a critical support zone in the 98.8 zone, and has been trading in the same sort of ‘stair-step” pattern all year without meaningfully “stepping back down.” 98.8 was the line of demarcation suggesting the first such step down could be in process. Once that technical zone was breached, USD/JPY launched into it’s biggest one-day move in several months.

– Eurodollars followed the move (both currencies strengthening vs the dollar). Euros had their own reasons for strengthening (Draghi press conference further supports the notion that the EU won’t print money. Euro likes…) but those same reasons suggest tough roads ahead with deleveraging and economic weakness.

– This putting together of 2 and 2, was a slow realization for market watchers as big trades started to pepper the US Treasury complex, which was already in “buy first, ask questions later” snowball mode.

– The snowball got a major push from 2.06/2.07 being broken in 10yr yields, a significant entry point to an even more significant technical zone stretching down to 2.04, and ultimately 2.0, even. The latter was effectively ‘tested’ today as 10’s hit 1.999 for a second or two, but 2.04 looks to be the modal floor. Technicians will take note of yield levels at 3pm to assess longer term trend changes, but would ultimately need tomorrow’s action to confirm them anyway.

– MBS Joined in the snowball!!! We’ve been talking incessantly about the disturbingly wider spreads in MBS and how the cart can lead the horse when MBS are weak enough (convexity selling in MBS dragging down prices in Treasuries), and now the REVERSE is happening today. We’ve discussed 2.10% in 10yr yields as one line in the sand, below which MBS have tended to look more optimistic. So the good times were already rolling for mortgage markets even before the bigger swing heading into the noon hour.

– Once the bigger swing hit, “more of a good thing” for MBS turned out to be just that, and the rally kept pace astonishingly well (in fact, this is one of the only instances where you’ll see little old mortgage markets outperform a global risk reversal snowball’s effect on Treasuries. Mark your journals!

– Speaking of global risk reversal snowballs… Yeah… that. It’s not fun or glamorous, nor does it make for sexy media headlines the way a big piece of data does, but these snowballs can do this. The longer they continue without great explanations, the bigger they can get, further confounding attempts to explain them. To this end, the words in this morning’s opening update, (published 2 hours before the crazy swings) are now unbelievably relevant:

“There’s no remaining significant economic data today, leaving tradeflows (jockeying for position and BASING TRADING DECISIONS OFF THE OBSERVATION OF OTHER TRADES) and technicals (TRADING BASED PURELY ON TRADING LEVELS, WITHOUT REGARD FOR ANY FUNDAMENTAL DATA) to guide the price action for the rest of the day.”

Sometimes the clearly delineated scapegoat for these kinds of moves just doesn’t exist. I know that’s a tremendously unsatisfying answer in what seems like a world of mathematical decisions and correlations, but it happens. Think of it like a murder case with overwhelming circumstantial evidence yet no murder weapon. Most of the circumstantial evidence is listed above, but the case isn’t closed until tomorrow’s witness is called to the stand at 8:30am (meaning that NFP could either confirm everything that just happened, or reinforce the 2.04-2.07 pivot zone in 10’s. Looks like we’ll be up in the air until then, but not without tons and tons of positive reprices to consider beforehand).

 

 

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