MBS RECAP: Bonds Slightly Weaker After Sorting Through Another Red Herring Delivery
Yesterday: Japan. Today: China. Stakeholders, journalists, and even a fairly wide swath of bond traders are eager to make sense of the past 2 days of weakness, even when that weakness isn’t easily ascribed to a single headline or development.
The first big trading idea in 2018 is to SELL longer-term bonds faster than shorter-term bonds (aka a “curve steepening” trade). We knew this was a risk. We also knew the resulting movement wouldn’t come with a satisfying way to explain it. After all, who wants to say “supply-related anxieties in govies and corporates combined with a glut of new year liquidity and repositioning in bond markets (even if it’s only marked profit-taking on 2017’s “flattener” trade) to force a break above key technical levels, fueled by room to run in slow stochastics and other longer-term momentum indicators?” Certainly not me… No one would understand it or believe it, after all!
It’s far easier to say things like:
“Japan unexpectedly cut its bond purchase operation by 10 billion Yen” -yesterday
“China says it could slow its purchases of US Treasuries” -today
At least yesterday’s news out of Japan had the benefit of being based on hard facts. Today’s China-related news was one of those stories that was in the right place at the right time–making its way to the top of the journalistic heap despite citing unnamed sources with vague information that the foreign government in question refused to corroborate.
The bottom line is that the China news wasn’t 1/10th of the market mover it was made out to be. Reasons were covered in detail for MBS Live members in this update as well as the attached video. Markets showed their willingness to disregard the news in earnest after the strong 10yr Treasury auction, ultimately returning very close to ‘unchanged’ on the day. Fannie 3.5 MBS ended the day just 1/32nd weaker. Almost every lender put out a positive reprice by the end of the day, although the average lender didn’t quite make it back to yesterday’s levels.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
101-29 : -0-01
2.5586 : +0.0126
|Pricing as of 1/10/18 5:35PMEST|
Today’s Reprice Alerts and Updates
1:10PM : Strong Auction: One Small Step To Reinforce Ceiling
10:11AM : Big Bond Sell-Off and The Human Quest For Meaning (China News Debunked)
MBS Live Chat Highlights
Brent Borcherding : “Huge Indirect. Guess the story of China not buying was just them creating their own opportunity.”
Gerry Suarez : “heats off for the short term…”
Matthew Graham : “”A” at least”
Matthew Graham : “RTRS – PRIMARY DEALER ACCEPTED BIDS 13.97 PCT OF AMOUNT TENDERED IN U.S. 9-YEAR 10-MONTH NOTES SALE, DIRECTS TAKE 47.93 PCT OF BID AMOUNT, INDIRECTS 73.11 PCT”
Matthew Graham : “RTRS – U.S. 9-YR 10-MO NOTES BID-TO-COVER RATIO 2.69, NON-COMP BIDS $8.17 MLN”
Matthew Graham : “RTRS – U.S. SELLS $20 BLN 9-YR 10-MO NOTES AT HIGH YIELD 2.579 PCT, AWARDS 10.65 PCT OF BIDS AT HIGH”
John Tassios : “Today is a good time for a solid A”
Matthew Graham : “10yr auction preview: Bid-to-cover has ranged from 2.27 to 2.54 recently, with an average just over 2.4x. The expected yield has been hovering just under 2.59%. Indirect bidding has ranged from 55-69% with a recent average just over 60%. For definitions of these terms, read: Treasury Auction Jargon, Definition, and Significance “
Joshua Cederlof : “Would love to catch a breath with a decent auction. Anticipating the opposite but dare to dream.”
Bryce Schetselaar : “Can’t wait for that lady that I quoted 3 days ago to come back and decide to go with me”
Oliver Orlicki : “OK here comes the mother of all rallys”