October has been unpleasant for the bond market–Treasuries specifically. That’s not to say it’s been a walk in the park for MBS. They too have lost ground consistently throughout the month, but those losses have been far better contained relative to their recent range. MBS are best characterized as “sideways” since August.
Treasuries, on the other hand, were only really sideways through September. Since then, they’ve broken 2 key range ceilings at .72 and .80.
As the chart shows, the most recent break above 0.80 is already in question. Yesterday’s gain brought yields back under that technical level. Any strength today would help confirm the positive shift.
So what would it take for bonds to log another win today? As always, there are several ways to answer. From a fundamental standpoint, one could argue that a confirmed 2nd wave of covid is driving a risk-off move for both sides of the market.
But if we take a step back and add just a few more weeks to the chart above, the correlation isn’t as reliable.
With stocks down more than 2% at times this morning, and 10yr yields only down 1-2bps, we have to question the power of a risk-off move to motivate additional bond gains. A better bet would be that both sides of the market are trying to find a range ahead of next Tuesday’s election. Fingers crossed, bonds seem content to have defined that range by safely staying under the highest yields since March. Meanwhile, stocks are consolidating around a midpoint that’s perfectly in line with pre-covid all-time highs.
Best we can tell, stimulus prospects are off the table until after the election. That’s a blessing and a curse for the bond market because it means traders will be left to sort out a double whammy of volatility in 2 weeks when election results may be finalized and the Senate will be back in session.
Bottom line: it makes sense for both sides of the market to be respecting ranges and favoring sideways movement given the uncertainty ahead. If the 2nd wave of covid gets worse before it gets better AND if stimulus remains elusive in early Nov, bonds should have no problem continuing to operate in the same sideways range (with a 10yr ceiling under 1.0%). And as long as Treasuries aren’t doing any worse than that, MBS and mortgage rates have already proven their ability to outperform enough to guarantee with near certainty that rates wouldn’t be any higher than they are right now. Those are some big “ifs,” granted, and they don’t address the day-to-day volatility that can affect shorter-term lock/float decisions, but it’s nice to know that mortgages don’t need to be too concerned unless things get much worse in the broader bond market.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-08 : +0-01
0.7560 : -0.0220
|Pricing as of 10/28/20 10:02AMEST|
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