MBS Week Ahead: Moderate Calendar Ahead; Bonds Start Strong; What’s Up With the MBS Chart?
The new week begins with “the roll” for 30yr UMBS–our in-house term to refer to the monthly settlement process for MBS coupons, and a perennial source of confusion for those trying to make sense of the chart on roll day. Reason being: today’s chart, for instance, makes it seem as if MBS prices are lower than those on Friday.
But today’s chart is not “apples to apples.” The left side (Oct 9) is the now-retired October 2.0 UMBS coupon while the right side (Oct 13) is the November coupon (now the most current month available to trade). November coupons were ALWAYS trading at lower prices than October coupons due to time value of money. Specifically, if you bought an October coupon on Friday, you’d get your first payment a month sooner than if you bought a November coupon today. As such, all other things being equal, that made October coupons more valuable to investors, just like November coupons are more valuable than December.
If we color code Oct, Nov, and Dec coupons and overlay them on today’s chart, here’s how it would look:
Bottom line: apples to apples (Nov vs Nov ), prices were actually HIGHER morning. It only looks like a drop if we’re comparing Oct to Nov. The day-over-day change on the chart uses yesterday’s closing price for Nov coupons. Thus, it’s a true indication of the day-over-day change in the MBS market.
Moving on to the broader bond market, Treasuries are starting the week with good buying demand, both in the overnight session and early domestic trading. There’s chatter about a paused Johnson and Johnson vaccine trial, but considering stocks are still much higher than they were on Friday afternoon, we have to infer some organic demand/strength is in play. In other words, bonds aren’t stronger solely due to news headlines–there’s some buying going on for other reasons. These reasons could be combination of technicals and timing (i.e. traders made a conscious decision informed by chart patterns to buy bonds when 10yr yields found support at .79 last week, but remained cautious ahead of a 3-day weekend that carried more risk than normal of political/pandemic developments).
Whatever the case may be, here’s how the asymptotic approach to 0.79 looked last week and how the subsequent bounce is kicking off the week ahead (and where the rally would need to move in order to achieve a true victory):
Data is moderate for the rest of the holiday-shortened week with Philly Fed on Thursday and Retail Sales on Friday being the headliners. It continues to be the case that market-moving econ data is more of a surprise than data that passes without any reaction at all. There are scattered exceptions to this rule, but they are just that: exceptions.
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-05 : +0-06
0.7289 : -0.0461
|Pricing as of 10/13/20 10:27AMEST|
Tomorrow’s Economic Calendar