MBS RECAP: decent day despite lukewarm treasure auction. Dovish Fed is helping
This morning’s weaker data on durable goods had no impact on trade levels. At the time, after a decent little rally overnight, bonds were about to add returns and selling pressures continued until 9:30 a.m. After a lukewarm 5 year treasury auction drifting sideways for a few hours, it failed to scare the bond traders. Preliminary gains followed with the help of somewhat cautious Fed speakers and a slight dip in stocks. All in all another good day to set up a case for support but still not enough to rest.
Econ data / events
Fed MBS purchase 10 a.m., 11:30 a.m., 1 p.m.
Consumer Goods -1.1 vs 0.8 f’cast, 3.5 prev
Core Cap-Ex -0.8 vs 0.5 f’cast, 0.6 prev
Market Movement Review
Bonds opened stronger in Asia and rallied into the European hours. 10-year returns hit 1.59% before bouncing off. The general tug-of-war was between new (global) lockdown fears and stronger economic data in Europe as well as the hesitation before the auction on government bonds. MBS start the day with 2 ticks (0.06), but that’s a solid achievement considering yesterday’s closing levels.
Paradoxical upward pressure on yields since 9 a.m. Hedge funds were better sellers based on the expectation that traders would relax ahead of the Treasury auction that afternoon. The dealers then sold as expected. Traders are taking small steps amid uncertainty about the realignment of managed funds at the end of the quarter. MBS and Treasuries are in negative territory on this day (10 years by 3 basis points and MBS by almost 8 basis points).
5 year auction was acceptable but not great. Bonds have barely changed in response, with 10 year yields rising just under 2 basis points higher at 1.64% on the day. UMBS outperform with 2.5 coupons by 1 tick a day.
The best levels of the day now with a little buying frenzy at 3pm CME graduation. 10 years are down 1 basis point on the day to 1.612% and 2.0 UMBS are up 2 ticks (0.06) and are trading just below 103.0.
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