What happened last week?
Mortgage backed securities (MBS) lost -33 basis points (BPS) from last Friday’s close, which caused 30-year fixed mortgage rates to increase and wiped out the prior week’s +37 BPS gain. We saw the best rates on Tuesday and the worst rates on Friday.
It was a very interesting week which could have caused much more volatility for MBS pricing than it did with very robust economic data, a bewildering jobs report, an ECB rate cut and a cease-fire in Ukraine.
ISM Manufacturing, ISM Non-Manufacturing, Factory Orders, Construction Spending and Auto Sales were all better than market expectations and were at very high historical levels.
The ADP Private Payroll report showed 204K new jobs but Friday’s Non-Farm Payroll (NFP) report showed only 142K which was well below the consensus estimates of 225K. After looking at all of the very strong manufacturing data, the bond market decided to ignore the NFP report as it simply doesn’t reflect current market conditions and they believe it will be revised upward significantly.
The European Central Bank (ECB) announced an interest rate cut that went into negative territory for deposits held at the ECB by their member banks with the idea that banks won’t sit on their cash..instead they will start to lend it out and stimulate the fragile Eurozone economy. They also announced their own version of an asset backed purchase program (similar to our QE) that will begin in October (while our QE will end in October).
The Ukraine and the pro-Russian separatists agreed on a cease-fire after the NATO summit which caused some of the “fear-factor” premium in bonds to abate.
What’s on the agenda for this week?
MBS are expected to see a +9 to +20 BPS improvement over Friday’s close. And for the week MBS is expected to trade within the same range that it has for the past three weeks. It is just been a matter of closing at the top end of the range vs the bottom end. Last week, it closed at the bottom end, this week it’s expected to close near the top end of the range.
This is a more moderate week for economic data compared to last week with the spotlight on Friday’s Retail Sales report as the biggest event of the week.
We will also get Wholesale and Business Inventories which will have an impact on 3rd quarter GDP projections.
There are three Treasury auctions this week but these are unlikely to materially impact pricing as the auction results will simply reflect market forces that are already in MBS at the time of the auction.
09/09 3 year note
09/10 10 year note
09/11 30 year bond
We start the day with a few events of note:
Domestic: Treasury Secretary Jack Lew said he Obama administration will decide “in the very near future” what actions it can take to make it less profitable for U.S. companies to shift their legal addresses to other countries.
- Scotland has the markets very concerned over the development of their independence vote in 10 days. For the first time, more than 50% of the populist votes are for independence. If that occurs, there will be much instability in British debt and Scottish currency and will rattle the financial markets.
- Ukraine: Whoops…the cease-fire didn’t hold.
Both of these events are giving MBS a little momentum this morning.