Mortgage Bonds are trading near unchanged levels as they try to produce gains for the 5th straight session. The recent gains have been due to the uncertainty surrounding the debt ceiling issues and the Fed’s future taper plans.
Today’s positive economic data from Weekly Jobless Claims and Gross Domestic Product had little impact on Bond trading, but Stocks are trading higher after the closely watched S&P 500 closed lower in each of the past 5 sessions.
I will continue to recommend a Floating stance, but in this fast moving market, sentiment can reverse in an instant. If anything changes, I will get back to you.
Initial Jobless Claims came in at 305k (325k expected) while continuing claims rose to 2823k (2818k expected). GDP QoQ came in at 2.5% (2.6% expected), Personal Consumption was 1.8% (1.9% expected) and Core PCE QoQ was 0.6% (0.8% expected). Later this morning Pending Home Sales will be out (-1% MoM and 6.3% YoY, expected).
Overnight, Asian equity markets rallied putting pressure on USTs early in the session. In the U.S., the market opened flat before selling-off after better than expected Jobless Claims which continue to beat expectations. Today is the last day of supply for the month (7-Year notes) and Monday will be both month-end and quarter-end. The House will also be voting on a spending bill that decides whether or not the Government “shuts down” on October
What happened yesterday?
Mortgage backed securities (MBS) gained +35 basis points from Tuesday’s close which caused 30 year fixed rates to move slightly lower.
Durable Goods Orders came in at 0.1% vs estimates that ranged from 0.0% to 0.2%. But the prior reading was revised downward to a dismal -8.2%. Still, it was an O.K. reading and close to expectations, the bond market was not materially impacted by this reading.
New Home Sales 421K vs est of 420K, this was a 7.9% gain from the much weaker prior period. This was not enough of a beat to materially impact pricing but it is good news that sales are up during a period of increasing mortgage rates.
5YR Treasury Auction results: $35B at 1.436% with a bid-to-cover of 2.67 vs recent avg 2.7, fairly decent demand but not a block buster. Not a big factor in rates either.
So, we had three events and none of them were enough of a variation to market expectations to influence bond prices. Yet, bond prices have steadily improved today…why?
Answer: Its the showdown on the shut down. Treasury Secretary Jack Lew stated today that we would run out of cash a little later than originally thought (October 17th). This could give everyone more time to negotiate an extension to keep the government open. But the market is still betting that there will be a government shut down and that is why MBS pricing is rising (better rates for you) and Treasury yields are falling.
Also, our friends overseas are helping to drive up our pricing (rates moving inversely…or lower – so that is good) as the European Central Bank (ECB) President Draghi has said they are ready to pump more cash into the banking system and are considering other stimulative measures.
Bottom line, rates are improving but not due to U.S. economic forces.