Mortgage Backed Securities (MBS) Overview
The much anticipated Non-Farm Payroll report arrived and it really disappointed. As a result, MBS shot up but then something interesting happened. They sold off and there was only a very small improvement in pricing.
Non-Farm Payrolls were a big disappointment. The market was expecting 185K new jobs but only got 113K. Any reading below 160K would be positive for MBS. But just as important as this reading was the prior reading which was a big-time miss at only 74K. The market expected significant revisions upward but it was only revised up by a mere 1K to 75K. MBS shot up initially as a result.
Unemployment Rate dropped from 6.7% down to 6.6%, but bond traders largely ignore this reading. The only reason it has significance to traders is the 6.5% trigger that the Fed had originally pegged to their Fed Fund rate but they have recently stated that they would keep their rates low even after the Unemployment Rate breaks below 6.5%.
There are no scheduled economic releases today, and this week has just a few key reports later in the week. The week is dominated by Federal Reserve officials speaking and Janet Yellen testifying at the House and Senate in the semi-annual required testimony by the head of the Fed on monetary policy, the economy and inflation. The Treasury will borrow $70B this week.
Janet Yellen is scheduled to testify at the House Financial Services Committee tomorrow beginning at 10:00 to report on monetary policy, inflation and employment
The Fed chair must testify twice each year to the House and Senate, a law previously known as Humphrey-Hawkins after the authors of the requirement. Her prepared opening text is expected to be released at 8:30 in the morning prior to when lenders normally set morning pricing. Her next appearance is on Thursday at the Senate Banking committee. More Fedsters; Tuesday 9:00 am Philadelphia Fed’s Plosser, later in the evening Richmond’s Lacker and Dallas’s Fisher. Wednesday 8:35 St. Louis’s Bullard.
Treasury will auction $30B of 3-year notes Tuesday, $24B of 10-year notes Wednesday and $16B of 30-year bonds on Thursday
The 10-year auction is the key this week; after rates have fallen recently the demand at the present levels will provide traders something to measure.
Markets still pondering the weaker jobs report last Friday
Job growth didn’t come close to the consensus estimates at +180K (+113K) and most were fully expecting the very weak December job growth at 74K to be revised substantially higher, but the revision was a minor increase of 1K. January unemployment fell from 6.7% in December to 6.6%; the decline though isn’t all because jobs are being created, but that more and more people are no longer looking for jobs. Retirements and less jobs available drove many out of searching for jobs. Consensus though is still optimistic based on economists’ forecasts. However, economists’ track records of forecasting is, to put it mildly, not good.
Don’t expect much improvement in the bond and mortgage markets early this week
With Yellen’s testimony tomorrow, although she isn’t likely to say much that will rattle markets, when the head of the Fed is in the spotlight traders usually are reticent before the fact. The stock market is still the driver but not as much as it was when the decline started. In response the 10-year and MBSs had nice improvements on safety moves out of equities into the arms of the Treasury. Those moves have lessened in the last week as stocks have settled down with the bullish bias regaining a little momentum. US stocks were hit hard on the emerging markets’ declines in their currencies, most stock traders now indicating that issue has been totally discounted; add in that the stock market was technically very overbought and now not so much.
Holding on by finger tips, MBS prices remain barely above their 200 day average for the 5th day in a row, but finding resistance to moving much above it
The 200 is critical for the price; so far it’s struggling at the moment to hold on. The 10-year note’s recent rally came close to its 200 average on the yield (2.55%), adding to the momentary touchy rate markets. The technical outlook still has a bullish bias but the momentum has slowed. To move lower in rate with the optimistic economic outlook (at least from economists), it will take a huge selling binge to reignite in the US and global equity markets. Unless that happens, interest rates will have a high wall to climb for much lower interest rates.
At 9:30 the DJIA opened -8, NASDAQ unchanged, and S&P -1; 10-year at 9:30 2.686% about unchanged and 30-year MBS prices +5 bps from Friday’s close.
This Week’s Calendar:
10:00 am Janet Yellen begins testifying at the House Financial Services Committee
Dec JOLTS job openings (N/A)
Dec wholesale inventories (+0.6%)
1:00 pm $30B 3 yr note auction
7:00 am weekly MBA mortgage applications
1:00 pm $24B 10 yr note auction
2:00 pm Jan Treasury budget ($-$10.0B)
8:30 am weekly jobless claims (-1K to 330K)
Jan retail sales (-0.1%, ex auto sales +0.1%)
10:00 am Dec business inventories (+0.5%)
Janet Yellen at the Senate Banking Committee
1:00 pm $16B 30 yr bond auction
8:30 am Jan export prices (+0.1%, import prices -0.1%)
9:15 am Jan industrial production (+0.3%)
Jan capacity utilization (79.4% frm 79.2% in Dec)
9:55 am U. of Michigan Fed mid-month consumer sentiment index (80.0 frm 81.2 in Jan)