MBS (Mortgage Backed Securities) OVERVIEW
This is a blockbuster week with a big-name economic report each and every trading session that has the weight to move the markets. We get a look into manufacturing with Chicago PMI, ISM and Factory Orders; and we get a ton of labor market data with ADP Private Payrolls, Weekly Claims, Non-Farm Payrolls and the Unemployment Rate.
Of course, the markets will focus the most on Friday’s Non-Farm Payroll report which is expected to come in at 196K. Traders will be using the data throughout the week to try to front-run the results of this report. In prior months, this report was viewed as a gauge to determine if the Fed would continue to reduce their monthly assets purchases (aka a “taper”). However, now the market understands that this reading is no longer likely to impact their path to lower the amount of purchases at each Fed meeting. But this number can still impact MBS pricing dramatically as the stronger this number is, the more MBS will sell off. The weaker this reading is, the more MBS will rally.
There are no major U.S. Treasury auctions this week to contend with.
After 3 straight weeks where there was no economic data on a Monday, there are two big events today:
Chicago PMI: Came in at 55.9 which is a pretty good reading considering anything above 50 is expansion. But it is one of the weaker recent readings and the market was expecting a much higher reading of 58.5. Generally, this type of miss to the downside is positive for bond pricing.
Janet Yellen is speaking in Chicago this morning and her comments can obviously have a big impact on the market and will need to be closely monitored.
What happened last week?
MBS gained +13 basis points (BPS) from last Friday’s close which caused 30-year fixed mortgage rates to move sideways after increasing the prior week. So far this month, the benchmark FNMA 4.0 MBS has lost -92 BPS which has caused rates to increase for the month. The market saw the lowest rates on Thursday and the highest rates on Monday.
Mortgage backed securities and other long-term bonds continued to be trapped between our domestic growth which is generally negative for rates and external factors which are generally positive for rates.
We certainly got another big dose of both last week. On the domestic front, the economic data showed so good news for our economy as 4th QTR GDP data was revised upward from 2.4% to 2.6%. The Durable Goods Orders were double the market expectations (2.2% vs estimated 1.1%), Initial Weekly Jobless Claims fell more than expected (311K vs estimated 325K) and Consumer Confidence improved and also beat forecasts (82.3 vs estimated 78.6). All of the above is positive for our economy and therefore negative for mortgage rates.
However, this negative pressure on MBS (which causes rates to rise) was offset by global concern over China’s banking system and rumored stimulus package and of course the mounting number of military troops that Russia has placed along the Ukrainian border. This drove up demand for U.S. based bonds and created very strong support for 2, 5 and 7-year Treasury auctions. This provided a nice level of support for bonds and as a result MBS moved sideways for the week.