Although the day began on an ugly note with MBS reaching as low as 99-15, an early stabilization followed by some friendly news from the Fed and what was an early 7 tick loss turned into a half point gain by the end of the day. That's a ysp-analogized swing of nearly three quarters of a point. Not bad... Chalk up the early stabilization to MBS following tsy's cues during a short covering rally ahead of tomorrow's auction. The consensus on the bigger mover of the day would be the NY Fed's purchase of just over $6 bln of 2-3 yr notes out of $29.4 bln offered. The offering was only slightly above average for previous repurchases in this maturity range, but substantially higher than the previous repurchase. This was bigger than expected and in seeming contrast to completion of the phasing out set to end in October. Wait, what?
Plain and Simple:
On a scheduled basis, the Fed buys back tsy's in order to make adjustments to their balance sheet or as a sort of support mechanism for existing policy. So you can think of it either as an accounting necessity, or simply "fine tuning" of their monetary policy. Either way, today was beneficial.
The purchases are made from primary dealers who offer up the securities for the Fed's perusal. Today, the menu consisted of 2-3 year notes totalling $29.4 bln. Of this, the Fed took down $6 bln which is higher than expected. In short, this shows a bigger demand-side of the equation than the markets had baked in, thus prices rise.
But additionally, it goes counter to some of the commonly held beliefs about impending Fed purchasing. Many believe (or believed?) that the amount of purchases would be gradually decreasing into October when the treasury purchase program is currently slated to end. The fact that they bought more than expected AND that there was no deceleration in purchasing in a week with actual treasury auctions causes speculation that they will also be a bigger than previously anticipated buyer later in the week on longer maturity treasuries. In fact, the long end of the curve (longest durations/maturities) was the biggest benficiary of the day.
As you may already know, when the long end of the yield curve benefits, the general implication is for lower MBS coupons to benefit as well since they have longer durations.
Whether you care about all that or not, the moral of the story is that today was a good day and came close to erasing much of Friday's damage.
With that out of the way however, and with the landing zone being squarely in singularity of the supermassive gravitational well of parnertia, it's right back to waiting for sufficient forces to make their case for an alternative the range-bound paradise we've been experiencing for nigh on two weeks now. The calendar picks up appreciably tomorrow with the following:
- Case-Shiller Home Price Index
- Consumer Confidence (forecasted to improve to 47.9 from 46.6
- FHFA Home Price Index
- TAF Auction Results
- State Street Investor Confidence Index
- 2 Year Note Auction
The biggest mover of the day in terms of potential would be the 2 yr auction which thankfully comes mid-day, thus allowing any catastrophic results to be avoided with a retreat to AM rate sheet pricing. That pricing however runs the risk of being impacted by price indexes adding fuel to Friday's home sales fire in addition to an understandable level of lender hedging ahead of significant data.
I wish we could tell you that we or anyone else has a sense of how things will shake out this week, but it really is all dependent on the incoming data and auction results (moreso the latter). I suppose being slightly on the sunny side of par would inform a slight lock bias assuming a continued status quo in the recent range trading (last week's range in the smaller view against 99-00 to 101-00 in the longer view. In fact, if you consider that the highs in MBS have been declining since July, we're actually right at the top of the trend which would add to a lock bias even more.
All that said, taking risk overnight is statistically not as stupid as taking risk by leaving the office at 12:59 PM for the day. The 1pm auction could send momentum in either direction, and mind you that's THREE directions with this summer's perennial dark horse: SIDEWAYS!
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