Skittish Over Data and Central Bankers With no relevant market movers on the US calendar today, it was notable to see just how willing the bond market was to react to overseas data. Specifically, inflation came in hotter in Spain. This sent European yields sharply higher overnight and US yields followed at a bit less than half the pace. While we wouldn’t say the pace was extreme, it was nonetheless surprising relative to the motivation. It’s an important reminder about how skittish bonds may be as the week progresses with bigger ticket data and central bank announcements. Econ Data / Events No significant scheduled data Market Movement Recap 08:50 AM Weaker overnight after Spanish inflation data. Stronger so far in US trading. 10yr still up 3.5bps at 3.542. MBS down a quarter point. 10:41 AM Sideways and choppy since the start of US trading, but still weaker on the day. 10yr up 3.7bps at 3.544. MBS down 10 ticks (.31). 02:10 PM Still sideways. Trading levels right in line with last update. 04:09 PM Some MBS-specific weakness now, partly fueled by illiquidity. 4.5 and 5.0 coupons both down just over 3/8ths of a point and roughly 6 ticks (.19) from intraday highs. 10yr still in the 3.54% range.
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So much illiquidity this week… But what does that really mean? Let’s break it down… There are buyers and sellers in the MBS market submitting “bid” and “ask” prices respectively. Sometimes the bid prices get a little crazy for a variety of reasons. These can range from actual people making actual decisions to computer programs erroneously calculating where bid prices should be based on other variables. In short, there are times when prices appear to instantly drop by large amounts without any justification in the news or any corroboration from Treasuries. MBS Live runs our own algorithm that filters out most, but not all of this noise. 10:56am ET was one such time. MBS prices appeared to drop an instant 3/8ths of a point. Sellers never changed their “ask” prices, and a few minutes later bid prices were right back in line with previous levels. As can be seen in the chart, this isn’t the first time this has happened in the past few days. It’s also not a new phenomenon in general, which is why we’ve had knowledge base articles like THIS ONE for years. Some crazy lenders actually reprice for the worse when this happens, even though they should not.
Limited Market Motivations as Traders Wait to Fill in Blanks There was a palpable absence of relevant source material to provide guidance for the bond market today. That was painfully obvious when the day’s biggest move followed headlines regarding the prospects for a slowdown in the European Central Bank’s rate hike trajectory. Such headlines may have had little impact on bonds on a day with a big ticket economic report, but alas! There are none to be found today and few to be found in the rest of the week. Retail Sales and a new policy announcement from the Bank of Japan are in focus for Wednesday morning. Econ Data / Events NY Fed Manufacturing -32.9 vs -9.0 f’cast, -11.20 prev Market Movement Recap 09:41 AM Moderately weaker overnight and pushing back in a stronger direction so far this morning. 10yr up 3bps at 3.533 and MBS down an eighth of a point. 10:20 AM EU bonds rallying on reports that ECB is considering slowing the pace of hikes after February. It was almost enough to get US bonds into positive territory, but both bouncing now. 10yr up 1.3bps at 3.514. MBS down 3 ticks (0.09). 12:53 PM Gradual weakness since 10am with a bigger illiquid drop in MBS just now. Prices fluctuating between 6 ticks (.19) and 13 ticks (.41) lower due to illiquidity. 02:29 PM Off the weakest levels and consolidating between the day’s highs and lows. MBS down 6 ticks with better liquidity now. 10yr up 3.5bps at 3.537.
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