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MBS RECAP: Bonds Slightly Weaker After Sorting Through Another Red Herring Delivery

January 10, 2018
by admin

Yesterday: Japan. Today: China. Stakeholders, journalists, and even a fairly wide swath of bond traders are eager to make sense of the past 2 days of weakness, even when that weakness isn’t easily ascribed to a single headline or development.

The first big trading idea in 2018 is to SELL longer-term bonds faster than shorter-term bonds (aka a “curve steepening” trade). We knew this was a risk. We also knew the resulting movement wouldn’t come with a satisfying way to explain it. After all, who wants to say “supply-related anxieties in govies and corporates combined with a glut of new year liquidity and repositioning in bond markets (even if it’s only marked profit-taking on 2017’s “flattener” trade) to force a break above key technical levels, fueled by room to run in slow stochastics and other longer-term momentum indicators?” Certainly not me… No one would understand it or believe it, after all!

It’s far easier to say things like:

“Japan unexpectedly cut its bond purchase operation by 10 billion Yen” -yesterday

“China says it could slow its purchases of US Treasuries” -today

At least yesterday’s news out of Japan had the benefit of being based on hard facts. Today’s China-related news was one of those stories that was in the right place at the right time–making its way to the top of the journalistic heap despite citing unnamed sources with vague information that the foreign government in question refused to corroborate.

The bottom line is that the China news wasn’t 1/10th of the market mover it was made out to be. Reasons were covered in detail for MBS Live members in this update as well as the attached video. Markets showed their willingness to disregard the news in earnest after the strong 10yr Treasury auction, ultimately returning very close to ‘unchanged’ on the day. Fannie 3.5 MBS ended the day just 1/32nd weaker. Almost every lender put out a positive reprice by the end of the day, although the average lender didn’t quite make it back to yesterday’s levels.

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