Mortgage Bonds look weary as prices seem to be topping out at current levels. Stocks are up so far today and that may continue to weigh on Bonds as the day progresses.
In economic news, Weekly Initial Jobless Claims fell in the latest week, but above expectations. This news is “ok”, but I am simply not seeing any meaningful improvement in the labor market.
I will begin the day with a floating recommendation, but it looks like the rally in Mortgage Bonds has stalled and prices could reverse lower. I will contact you if there are any sudden changes.
Trade Balance came in at -38.8 billion vs. -39.4 billion expected. Initial Jobless Claims was 350k (340k expected) and Continuing Claims ticked up to 2874k (2870k expected). Markit US PMI Preliminary came in at 51.1 vs. 52.5 expected and at 11:00 AM EST the KC Fed will be released (2 expected).
Overnight, stocks were the story as China Manufacturing PMI came in at the highest level in over half a year. The equity strength led to Treasury weakness however this trend is being reversed here in the U.S. after worse than expected Initial Jobless Claims. Ten year notes are up slightly but MBS are 1-3 tics wider to duration hedges as profit taking has kicked in with 10-Year notes approaching resistance at 2.45%.
What happened yesterday?
Mortgage backed securities (MBS) gained +6 basis points from Tuesday’s close.
Yesterday was a very important test for the U.S. 10 year Treasury bond. If the 10 year broke below the 2.50 yield level, then you would see some better pricing on your end as MBS may try to test our 200 day moving average. We did make a run at it but failed to test our 200 day moving average for our benchmark FNMA 3.50 November coupon as we missed it by 31BPS.
The 10 year Treasury note did trade below the 2.50 yield level…dropping all the way down to 2.4713. At that point MBS rallied to their best levels of the day which was +31BPS higher than yesterday’s close.
But Treasuries rebounded…getting back to 2.5011 and MBS sold off of their highs of +31BPS at 2:05EDT and sold off -25BPS from those highs down to +6BPS by 5:00EST.
Import Prices fell on a year-over-year basis which is a slight positive for our economy as so much of our raw materials or sub-assembly components come from overseas. With lower import costs, it is anti inflationary which is usually a positive for bonds.
Mortgage Applications dropped -0.6% for the week. MBS do not react to this data as demand for MBS is already known well before this report is released.
Across the Pond: U.S. based bonds are seeing more demand due to concern from overseas on a couple of fronts. First up is the banking sector in Europe as the European Central Bank (ECB) is set to start another round of bank stress tests…and this after some weak bank earnings. China’s banking system is also under pressure as their major banks announced huge write offs on bad debts causing traders to be concerned about the projected growth rate in China.