What’s on the agenda for this week?
Intra-Day Lock Status: Neutral. The global fear-factor-premium is very much in play today and providing great support for pricing. But…you need new…new…new..something new…an escalation over and above the current market expectations. You see, the market already knows about Portugal, Israel, and the Ukraine. The market already expects things to deteriorate in all of those situations. So, it will take an escalation to unexpected levels for MBS to improve.
Mortgage Backed Securities (MBS) Overview
We start the week off with a big “yawn” as there are no major reports today.
The focus this week will be primarily on Janet Yellen’s Humprhey Hawkins testimony in front of the Senate with a repeat with the Congress. Traders will be watching closely for any new information regarding the timing of the first rate hike.
There are no major U.S. Treasury auctions this week to contend with. Domestically, the most important economic release of the week is Tuesday’s Retail Sales report. The market is expecting a month-over-month improvement of 0.6% which is double the prior reading. If we get a reading above 0.6%, it could pressure pricing.
However, regardless what our economic readings are this week, we will continue to see strong underlying support for U.S. bonds due to the continued concern over global developments, as Israel has their troops poised for a ground invasion and they have shot down a drone.
What happened last week?
MBS Overview – Learn from the Past
MBS gained +30 basis points (BPS) from last Friday’s close which caused 30-year fixed mortgage rates to move to higher for the week. We saw the best rates on Thursday and the worst rates on Monday.
This was a very light week for economic data with the focus on the release of the minutes from the last FOMC meeting which appeared to show that the Fed was leaning towards ending their massive asset purchase program of U.S. Treasuries and agency mortgage backed securities in October.
But the main reason for the improvement in rates is the flight to safety into U.S. bonds.
Overseas Woes: (bad for them…good for our bonds)
Europe: Very disappointing French (-1.7%, Exp. 0.2%, Last 0.3%), Italian (-1.2%, Exp. 0.2%, Last 0.5%) and Dutch (-1.9%, Exp. 0.3%, Last 2.3%) industrial Production data, raising concerns about a European recovery.
China: Exports trailed estimates in June, suggesting support for growth from global demand will be limited as leaders try to defend their economic-expansion goal of about 7.5% this year.
Japan: Machinery orders fell the most on record in May, suggesting that companies remain cautious about deploying record cash reserves into investment.
Israel: Mobilized 20,000 soldiers for a possible ground invasion of the Gaza Strip, as militants there extended their rocket barrage and the Palestinian death toll climbed to at least 75 as Israel continued with their 3rd day of air strikes. Hamas has shot off over 200 rockets in the last day into Israel.
Ukraine: Donetsk is steeling itself for a siege as troops encircle separatists who’ve pulled back to the biggest city in Ukraine’s conflict zone after months of bloody unrest.
Portugal: Portugal’s 10Y yield jumped +22bps amid concern over problems at the nation’s second largest bank, as it is most likely insolvent and was one of the largest purchasers of Portugal’s bonds.