Solid Gains Despite MBS Underperformance

US Treasuries had a tough time digesting auction supply last week, but have been nothing short of enthusiastic since then.  This isn’t to say the auction cycle was the biggest market mover in the past week.  After all, there were logical reactions to economic data.  Rather, we’re attempting to reconcile the underperformance in MBS at the start of the week.  In addition to the ebbs and flows surrounding the auction cycle, outperformance of the long end of the yield curve also commonly causes a bit of a lag in MBS.  As for today’s data, it was all about ISM Manufacturing which came in with a weaker headline and a lower “prices paid” component. 

Econ Data / Events

S&P Global Manufacturing PMI

51.3 vs 50.9 f’cast, 50.0 prev

ISM Manufacturing PMI

48.7 vs 49.6 f’cast, 49.2 prev

ISM Prices Paid

57.0 vs 60.0 f’cast, 60.9 prev

Market Movement Recap

09:46 AM No major reaction to PMI data.  MBS up 3 ticks (.09) and 10yr down 3.8bps at 4.46.

10:06 AM 10s are now down 8bps on the day at 4.418 and MBS are up at least 6 ticks (.19)–possibly more by the time liquidity improves.

03:04 PM MBS perfectly flat at highs, up a quarter point.  10yr near best levels, down 9.5bps at 4.403.

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As far as economic data goes, there’s CPI, NFP, and then there’s everything else.  In the “everything else” category, a small group of 3-6 report vie for relevance and impact on any given month.  The ISM PMIs are almost always in the running and are certainly one of the more consistent upper-2nd-tier releases in terms of bond market impact.  This morning’s manufacturing PMI is no exception.  With both the headline and the inflation components coming in weaker than expected, it’s been an easy trade for bonds so far this morning with MBS adding about a quarter point and 10yr yields down 9bps at 4.41% in the 10 minutes after the data came out.

Certain borrowers cut off from help due to the market’s elevated equity levels and rates may fare better under coming changes made at the direction of the FHFA.

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Following the closing of the transaction in the third quarter, Michael Isaacs, the CEO of GO Mortgage, will take the helm of the combined company.

The title insurance giant was one of several major mortgage players to suffer a hack late last year.

Data Driven Rally, But Next Week’s Data is More Important

By the end of this holiday-shortened week, bonds didn’t quite manage to completely erase the damage done during the first half, but they came close enough to help balance the near term outlook.  Credit goes to the slightly lower reading in Core PCE for the bulk of the AM rally.  But Chicago PMI didn’t hurt, falling to the lowest levels in more than a decade apart from the initial covid lockdown. Bonds didn’t rally for much longer after that and then spent the rest of the day in a sideways, narrow range, just above the 4.50% technical level.  As big as this week’s apparent volatility may have been, next week’s potential is much bigger as it brings the typical combo of events seen during the 1st week of every month (ISMs, JOLTS, ADP, NFP).

Econ Data / Events

Core PCE m/m

0.2 vs 0.3 f’cast

Core PCE  y/y

2.8 vs 2.8 f’cast/prev

Chicago PMI

35.4 vs 41.0 f’cast, 37.9 prev

Market Movement Recap

08:58 AM Stronger after PCE data.  MBS up 5 ticks (.16) and 10yr down 4.4bps at 4.509

10:03 AM Additional gains after Chicago PMI with MBS up 7 ticks (.22) and 10yr down 6.1bps at 4.491

01:11 PM MBS an eighth off best levels but still up 3 ticks (.09) on the day.  10yr still down 4.1bps at 4.511 but up from lows of 4.49.

02:54 PM Weakest levels of the afternoon with MBS up only 1 tick (.030).  10yr still down 3.9bps at 4.513

This week got off to a late start as markets were closed on Monday for Memorial Day. Upon returning to the office, traders began pushing rates higher almost immediately. It’s often said that the bond market can experience elevated, seemingly random volatility amid the lighter trading participation seen on the days surrounding 3-day weekends.  Tuesday may have been a good example as it brought the biggest move of the week despite an absence of high consequence data. That’s not to say that data was completely absent.  Traders digested comments from several Fed speakers with the most memorable example coming from Minneapolis Fed’s Kashkari who said he’d need to see “many” more months of good inflation data before the Fed would consider cutting rates.  This is a departure from the average Fed speaker who uses words like “several” to discuss the same dependency.   In addition to Fed comments, there was a condensed schedule of Treasury auctions.  These regularly scheduled auctions account for the “supply” side of supply and demand in the bond market.  Higher supply means lower prices and higher rates, all other things being equal.  In this case, the amount of supply is published well in advance, but the auction process provides a temperature check for investor demand.  The relatively lower demand at this week’s auctions also played a role in pushing rates higher in the first two days. Things began to improve on Thursday–not only because auctions were over, but also due to rate-friendly revisions in the quarterly GDP data.  Finally, Friday’s PCE inflation data helped add momentum to Thursday’s recovery.

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