What Happened Last Week?
Mortgage backed securities (MBS) gained 73 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower. It was a nice reversal after two straight weeks of MBS pricing falling (higher rates).
Our domestic economic data didn’t materially change the landscape as it trended in the same direction that we have been seeing. And that is strength in some areas such as housing (Existing Home Sales) and labor (Philly Fed employment component) and slow growth in other areas such as manufacturing. Overall, the economy is growing at a slow to moderate pace which is very bond-friendly as it puts the prospect of inflation further down the road.
The real action started on Wednesday with the release of the minutes from the last FOMC meeting. There were just as many dovish (keep rates lower longer) as there were hawkish (raise rates now or soon). The overall tone was that the Fed stands ready to raise rates and that they just need to see a little more growth in the labor sector. But the financial markets zeroed in on a comment that the Fed was concerned about China…and that it was off to the races for MBS pricing as story after story out of China showed economic weakness and financial instability which caused foreign investors to dump their stocks and park their cash in the nice and safe warm waters of U.S. Treasuries and Mortgage Backed Securities.
This flight to quality went global with our own stock market (DJIA) tanking over 200 points on Thursday and a whopping 500 points on Friday.
Last week was the first real gain in three weeks (week ending 08/09 MBS lost 2BPS, week ending 08/16 MBS lost 44BPS and last week MBS finally had a gain that hit +74BPS). But is that one week a volatile bump or a longer term trend? And that is the question the bond market is struggling with as our own economic data supports a little pressure on pricing but global fear is a boon for our bonds. While the stock market has had very little influence on bonds in 2014 and the first half of 2015, that is certainly not the case right now. MBS rallied over 50 BPS in early trading but have sold off and are trading back below the 200 day moving average…just like it did on Friday. This simply is not a real trend reversal until MBS can close above that moving average…and that isn’t out of the realm of possibilities yet and will need to be very closely watched.
What’s on the Agenda for this Week?
This is a big week for domestic economic data with a revision to the previously released 2nd quarter GDP, with Durable Good Orders, Consumer Confidence and PCE getting the most attention by bond traders. But it will be global fear that drives MBS pricing this week.
Treasury auctions this week:
8/25 2 year note
8/26 5 year note
8/27 7 year note
8/24 – Dennis Lockhart
8/26 – William Dudley
Jackson Hole, WY: The annual economic symposium will start this Thursday and carry through Friday, with just about every economic and financial heavyweight there. The markets will be paying close attention to comments and stories out of the symposium.
Across the Pond: Economic weakness and instability in China will continue to be a major driving force in the marketplace but so are Greece, Japan’s woes, Eurozone’s growth, and potential bond defaults by Puerto Rico and others. The escalation or de-escalation of these “fear factor” stories will guide pricing this week.
The question that bond traders are struggling with is if there is a true trend change or is it just choppy volatility based upon temporary fear. While the jury is still out on that, from a technical perspective, they are still trading above the very important 200 day moving average, It may close above it and that would be a very strong technical signal that we have hit a trend reversal.
There were no economic releases nor Treasury auctions today. Instead, MBS were caught up in a whirlwind of negativity and was one of the only safe harbors as investors pulled out their hair and gnashed their teeth.
Stock Market: The DJIA (and other indices) have had wild swings today. In fact, at one point the Dow was down 800 points. And MBS have had a wild ride too. At one point (9:32am EDT) MBS were up 73BPS for one tick and reached a low of -10BPS at 11:54am EDT for three ticks) That is some major volatility.
On Friday, the stock market closed down more than 500 points and MBS were up only 5BPS for the day. These are HUGE MASSIVE stock market sell-offs. And certainly they are causing a lot of volatility in MBS on an intra-day session. But when the smoke clears at the end of the MBS trading session, the net impact on MBS is actually very small. That means between Friday and Monday’s stock market sell-off of over -1000 points, MBS are up a net of +16BPS.
Oil: WTI Crude was under $38.00 and that provided a tremendous amount of momentum for MBS today.
Tomorrow will be more housing news with Case-Shiller and New Home Sales. But it is Consumer Confidence that carries the most weight among bond traders.