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Your weekly MBS wrap

Bryan McNee, senior bond analyst for MBS Authority, presents your weekly MBS update, explaining moves on the mortgage bond market, what you can expect for the week ahead and how to adjust your business to stay ahead of the curve.

Video transcript below:

Bryan S. McNee, Senior Bond Analyst
Bryan McNee:  Hello, I am Bryan McNee, Senior Bond Analyst for MBS authority reporting for MPA TV.

Today we are going to discuss what happened last week and what’s on the agenda for this week starting July 8th.  Last week mortgage backed securities sold off a whopping 246 basis points.  Now remember when mortgage backed securities lose pricing i.e. they sell for less money, mortgage rates go up.  

In fact we had the highest mortgage rates of 2013 on Friday afternoon.  So let’s take a look at what happened during the holiday shortened week.  The economic data was stronger than expected, strong factory orders, stronger than expected total vehicle sales, ISM manufacturing was higher and ISM servicing was a tad late, but it was still above 50, which showed economic expansion.  

But last week was all about jobs.  ADP private payroll much better than expected and on Friday’s non farm payroll report, we had a big time beat to the upside as well as a major addition to May and April, that stronger than expected non-farm payroll sent mortgage backed securities downwards.  Why?  Well’s it’s happened the last two times.  So it’s three times in a row that mortgage backed securities have sold off on the unemployment report.  

Now forget about unemployment rate which remained unchanged at 7.6%, that’s a phone survey, it doesn’t impact traders decisions.  What does is non-farm payroll data, real data and as the job picture improves, the likelihood of the Federal reserve pulling back or tapering on their bond purchases increases.

And so essentially what you have was a lot of traders looking at saying the likelihood of the Federal reserve pulling back on bond purchases sooner rather than later maybe as early as September, has certainly impacted mortgage backed security prices.  Likely what’s going to happen is that at some point by the end of the year, the will start to pull back on mortgage backed security purchases and leave treasury purchases alone.  But your mortgage rates are not determined by treasuries, they are determined by mortgage backed securities and that’s why you saw that big sell off.  

Now what’s on the agenda this week.  We have an interesting week.  Where there is a big treasury supply of 3 year notes, 10 year notes and 30 year bonds.  The biggest event this week is by far the release of the Federal Open Market Committee (FOMC) their minutes and the minutes will be released followed by Ben Bernanke having a conference.

Now let’s talk about those minutes.  The last Federal Reserve meeting if you recall, mortgage backed securities had a huge sell off and this was due to basically traders reading between the lines and assuming that the tapering would begin in the 4th quarter of 2013.  That’s why you had a big sell off.  Now the minutes sort of give us an inside look at behind the scenes, just how many of the members were in favour of it, how many were against, what were they really discussing and so this could really impact your pricing when this report comes out.  

Now we also have initial jobless claims, which are also very key, PPI which is Producer Price Index is on Friday and University of Michigan Consumer Sentiment, consumer sentiment and consumer confidence, two separate measurements have both been very strong and the stronger these readings are, the worse it is for mortgage backed security pricing. Now this morning Monday July 8th we had a nice bounce, recovering about 60 basis points of that big time loss last week and that’s just simply due to the market correcting a little bit due to overselling a little too far last Friday.

We don’t get a real dose of data to react to until Tuesday with the wholesale inventory, even that’s a mid level report.  So the key is going to be on the FOMC minutes, that is everything this week.
Have a fantastic week and hope to see  you soon!

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