MBS Pricing Snapshot

Manufacturing activity in the central Atlantic region pulled back in October after improving somewhat last month, according to the Richmond Fed's latest survey. The seasonally adjusted index of overall activity was pushed lower as all broad indicators of activity — shipments, new orders and employment — were in negative territory. Other indicators also suggested additional softness. Capacity utilization turned negative, while backlogs remained negative but improved from its September reading. Moreover, the gauge for delivery times changed little, while raw materials inventories grew at a slightly quicker pace, and growth in finished goods edged lower.

MBS are just a few ticks off their highs of the morning after rallying nicely to start the day. It now looks like bond markets are in the final stages of a brief consolidation that began last Wednesday. This has taken shape in much the same way as the consolidation in mid August where 10yr yields tested a break higher from 1.80 and ultimately returned lower.We have the same sort of exploratory selling in early September and over the past 4 sessions, but 10's keep coming back for support at 1.80.

Superficially, that seems like good news, but the series of "higher lows" can't be ignored. From the July yield lows, there's a fairly regular trend connecting most of the bounces. That ominous uptrend in yield is the easy part to identify, but this 1.80 business could either be a true horizontal support area or simply a pause for consolidation on the way higher. It will be easier to determine that after today's session.

Speaking of today's session, it seems to have gotten its most significant boost overnight during the European hours. There's speculation that last night's presidential debate was a positive event for bond markets and negative for stocks but we're not super comfortable with that chain of causality. More on this later, but suffice it to say, Europe led domestic bond markets into stronger territory overnight either simply because the broader market is continuing to hold its ground and bounce in a "risk-off" direction or due to things like Moody's downgrading various Spanish debt.

Things have been and continue to be relatively slower than the end of the previous week and despite the fact that the consensus seems to be that the Fed can't have much to say tomorrow, we still think anticipation of tomorrow's FOMC Announcement could play a role int he current consolidative move.

Either way, it's been positive for bond markets so far with Fannie 3.0 MBS up 10 ticks at 104-22, just off the highs of the morning and 10yr yields down more than 4 bps at 1.769. There's no super significant data on tap for the day though the Richmond Fed Index reports at 10am and the 2yr Treasury auction goes off at 1pm. These aren't likely to register a response in MBS (especially the 2yr auction), but we'll let you know if they do.