Powell Testimony, Skittish Markets, MBS Roll

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Sharp Credit – Credit News – Credit Information

Amid a dearth of important economic data between now and Friday, the bond market doesn’t have much to do when it comes to pricing in bigger-picture economic fundamentals.  Even then, the word around the campfire is that traders are planning on giving much more credence to global economic data collected after January 24th, when the coronavirus fear really hit its stride.

In the meantime, coronavirus updates themselves will continue to serve as guidance givers for both sides of the market.  Stocks seem especially eager to trade the deceleration in the coronavirus case count while bonds remain cautious.  Notably, stocks are also willing to move for interesting reasons.  See if you can guess what happened here:

20200211 open

Something did indeed happen, but it’s not as interesting as it may seem at first glance.  In short, the NYSE open happened.  The spike began exactly at 9:30am and there were no relevant headlines or data releases at the time.  This was simply the result of a flood of liquidity that always hits at that time.  When those cards were turned face up, more of them happened to say “buy” vs “sell.”  Incidentally, this was a Monday (if that wasn’t already obvious based on the dates on the chart) and thus the first time the NYSE opened after a weekend of coronavirus information.  

Bonds have been reasonably willing to take cues from stocks, but clearly aren’t slavishly tied to them.  After all, stocks are pushing all-time highs while the 10yr is still in the 1.5’s.  No wonder the Fed says asset prices may be a bit high (higher prices = lower bond yields and higher stock prices, in other words).

Today’s events aren’t epic in terms of expected impact, but they may register a response nonetheless.  The only headliner is the Powell congressional testimony at 10am ET.  Market movement potential depends on the questions he’s asked, but even then, the Fed has been a relatively open book recently, with a very high bar for additional rate cuts or hikes (by the way, where’s their credit for deftly pulling off a 3-cut “fine-tuning adjustment” without any ill effects?). 

Lastly, keep in mind that today is the MBS Roll (monthly coupon settlement).  This means the most immediate Fannie MBS coupons being traded are now March deliveries and February coupons are all allocated for final settlement tomorrow.  This is a multi-day process with a “notification day” (where traders specify the loans going into the MBS pools that they’re about to sell) on Monday and the final settlement tomorrow.  When this happens, the market begins trading the next settlement month as the “front month.”  

So why do prices seemingly drop?

Simple!  If you own a February MBS coupon, you’re going to begin collecting interest on that one month sooner than if you owned a March coupon.  Having that money a month earlier has a certain value attached to it (after all, if you’re an investor and I give you money today as opposed to 30 days from now, you could conceivably do something with it to make more money).  That value = the difference in prices between February and March.  

Prices only drop on MBS Live because March coupons were ALWAYS trading a bit lower in price than February coupons, and we’ve simply changed our spotlight to focus on them.  That’s why the roll doesn’t directly impact loan pricing.  Put another way, if we began charting March MBS prices 2 weeks ago, you wouldn’t notice a big price drop today.



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