Late December Liquidity Causing Volatility


Last Friday I said that bond traders had “had enough” when it came to reacting to every little tax bill headline.  That theme held true today, but now we might also say that traders have “had enough” of active trading for the year as well.  In fact, last week’s recap touched on this topic in discussing the waning liquidity heading into the end of the year (i.e. last week was characterized as “last call” for active trading).

A highly liquid marketplace is a bustling marketplace.  Late December sees the bustle die down among bond traders.  There is still plenty of money changing hands, but a far greater percentage of it is now being driven by boring, compulsory factors, like year-end portfolio adjustments and general hedging activities that don’t even register on the scale of importance during more liquid times of year.

All of the above adds a certain randomness and unpredictability to intraday movement.  It means we don’t have to rush to understand any intraday move that leaves the broader range intact (as today’s did).  Still if we want to assign blame, the best place to look is the bounce in the yield curve (2yr vs 10yr yields for instance), which bottomed out again by the end of last week, basically matching the post-crisis record.  Traders were clearly backing away from that trade to start the current week.  The chart from one of today’s updates on MBS Live shows how the curve (green line) was leading the way for outright 10yr yields (yellow line).  This only became more pronounced as the day progressed.

MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.


FNMA 3.5

102-22 : -0-04


10 YR

2.3942 : +0.0392

Pricing as of 12/18/17 5:26PMEST

Today’s Reprice Alerts and Updates

1:37PM  :  ALERT ISSUED: Negative Reprice Risk Could Increase For Some Lenders

10:51AM  :  Holding Slightly Weaker Levels After NAHB Data

MBS Live Chat Highlights

Brian Bockholdt  :  “I’d be shocked if it didn’t pass. I think it’s a done deal. They’ve made concessions to get all the main detractors on board.”

Hugh W. Page  :  “Article this morning in the WSJ about just that. Corker claims he had no idea that change was in there.”

Ted Rood  :  “I’m sure his sudden change of heart had nothing to do with lucrative personal financial gain.”

Eric Sayer  :  “Corker on board after they updated something about real estate income…he evidently has a decent amount, nothing like helping out your #1 special interest group, YOURSELF”

Matthew Graham  :  “they have been for a while”

Leonard Ujkic  :  “I’m now reading Collins and Flake are onboard …”

Victor Burek  :  “i thought the 10k SALT deal got Collins on board”

Hugh W. Page  :  “The Senate vote is dicier than we think. I don’t think we’ve heard for sure about Collins and Flake. Their votes won’t matter if McCain comes back and votes but they matter big time if not. And, something fishy to me about Corker’s sudden “Yes” on Friday for no apparent reason. What if he’s setting everyone up for a last minute No to derail the bill just to poke POTUS in the eye for how he was treated by him. You never know…… :)”

Leonard Ujkic  :  “Do Collins and Flake now support the bill?”

Original Source