What happened last week?
MBS Overview – Learn from the Past
Mortgage backed securities (MBS) lost -24 basis points (BPS) from last Friday’s close which caused 30 year fixed mortgage rates to move slightly higher from the prior week. It was the second consecutive week of losses.
It was a holiday-shortened week that once again saw very strong U.S. economic data which pressured MBS pricing. The following received the most market attention:
- GDP: The T-Rex of economic reports was much stronger than expected. The final revision to the 3rd quarter GDP came in at 5.0%. The market was expecting a reading in the 4.1% to 4.3% range. This number was originally released at 3.5% and then revised once to 3.9% before this final revision to 5.0%. This will change everyone’s guestimate upward for the annual GDP rate for 2014 and is very negative for bonds.
- Consumer Sentiment: The final number for December was very strong with a reading of 93.6 vs estimates of 93.5 and was one of the best readings in over 7 years. This is generally negative for MBS.
There were also small increases in Personal Spending and Personal Income, while PCE showed no threat of inflation in the short term. Both New Home Sales and Existing Home Sales were lighter than expected and Durable Goods disappointed, but the market largely ignored those reports as there are some large seasonal adjustments that may have skewed the data to the downside.
What’s on the agenda for this week?
There is excellent support for MBS this week with Japan circling the drain (issuing 2 year notes with negative yield), concerns over Greece and the future of the Eurozone and Russia’s seemingly unavoidable economic collapse. But…the domestic economic data will be strong…but not by enough to offset traders’ concern over global events.
We have our second straight holiday-shortened week.
There are no major (or minor) economic releases or Treasury auctions today.
MBS have received some positive momentum in Greece. Yes….Greece is baaaaaaack. They failed (for the third time) to elect the Prime Minister’s selection for president during parliamentary votes. This means that they will now have a “snap” presidential election on January 25th which is a populist vote. Currently, the party that is clearly in the lead is one that supports renegotiating their debt (which would entail threat of default) and or simply screwing over the debtors and leaving the Euro currency altogether. This has the potential to cripple the Eurozone and it has money flowing into U.S. bonds.
The biggest domestic events of the week to watch: Consumer Confidence, Chicago PMI and ISM Manufacturing. All are expected to have very strong readings and the stronger the readings, the more pressure MBS will see.