Incidental Weakness Ahead of CPI Data

Bonds were marginally weaker on Monday with no obvious scapegoats in sight. Some reporters pointed toward Fed Chair Powell’s criminal inquiry as rattling the market, but bonds were effectively unchanged in the 1pm hour after a well-received 10yr Treasury auction.  More importantly, there was no clear correlation between the overnight news and the overnight market movement. Volume was the lowest in several days–typical for a data-free Monday. MBS underperformed, but only because they’re still range-finding after last week’s massive outperformance. Tomorrow morning’s trading deserves much more focus than anything seen today. CPI will be out at 8:30am ET and it is expected to be a more tradeable installment of the data compared to the last release (which proved to be questionable due to data collection constraints surrounding the shutdown/reopening timeline).

Market Movement Recap

08:54 AM Moderately weaker overnight but holding inside the range. 10yr up 1.9bps at 4.19. MBS down an eighth of a point.

11:56 AM No reaction to 3yr Treasury auction.  10yr up less than 1bp at 4.18 and MBS down just over an eighth of a point.

02:49 PM MBS down 9 ticks (.28) and 10yr up 1.5bps at 4.186

The most important-sounding news over the weekend was last night’s subpoena of Fed Chair Powell over statements made to congress regarding the Fed’s building renovations. Bond yields were slightly higher this morning and commentators erroneously connected those dots. There was actually no meaningful movement in either direction when the news hit, but trading volume confirms the news was noticed.

Forex markets also confirmed a reaction with the dollar losing obvious ground vs the Euro, but Treasury futures weren’t well-correlated with that move.  The following chart shows the percent change in EUR/USD and 10yr futures prices (note for the keen observers, the y-axis is inverted such that a lower orange line means lower bond yields and a lower blue line means a weaker dollar).

Weakness crept in gradually in the overnight session and about half of it has been erased in early trading. The net effect is a bond market that continues to operate in the same old range, albeit close to the weaker boundary.

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Home prices are now something Americans can wager on. Polymarket partnered with Parcl to offer prediction markets tied to housing price indices.

Trump’s proposed $200B MBS purchase briefly tightened mortgage spreads, but analysts question the long-term impact on mortgage rates and GSE balance sheets.

The deal which brings hundreds of thousands of agents under one roof also combines retail lender Guaranteed Rate’s separate joint ventures with each brokerage.

The Senate allowed the nomination of a permanent director of the Consumer Financial Protection Bureau to lapse, giving acting Director Russell Vought more time to lead the agency on a temporary basis.

Lenders shouldn’t expect the latest jobs numbers to yield major monetary policy moves after the unemployment rate came in mostly flat last month, experts say.

On a week where the mortgage market was most likely to experience volatility due to Friday’s jobs report, Thursday afternoon’s surprise announcement of $200bln in GSE MBS (mortgage-backed securities) buying stole the show. This was already juicing the underlying MBS market yesterday afternoon, but traders took the surge to the next level this morning. This matters because MBS dictate mortgage rates.  When MBS are rising/improving/surging/etc., it implies lower rates. MBS had improved so much this morning that the average lender released their best rate sheet since Feb 2, 2023–the lowest level since September 2022.   The caveat is that MBS experienced significant volatility throughout the day and that volatility is likely to continue. As of this afternoon, at least one lender has already bumped rates back up a bit.  If more lenders follow suit, the end of day average rate could move up, but it would still likely be the lowest in at least a year.  Bottom line: the market didn’t have much of a reaction at all to the jobs report. The MBS market continues sorting out a huge reaction to the GSE purchase news. Rates are definitely quite a bit lower. It remains to be seen how much lower they’ll be when the initial volatility settles down–something that will probably require more clarity on the specifics of the MBS buying plan.

Wild Ride For MBS as Traders Digest New Developments

We may have been looking to the jobs report as this week’s biggest potential source of volatility, but that changed on Thursday afternoon after Trump’s $200bln MBS buying announcement. Treasuries have only been able to watch from the sidelines. At one point this morning after the jobs data, Treasuries were several bps weaker while MBS were in the midst of their biggest rally in months (up more than a half point at the time). There was a rapid “distribution” phase following the initial rally, but prices bounced back to end the day up about a quarter point.  Higher coupons are getting no love as they are not assumed to be in fashion as the new buying commences.  Details continue to matter, and we’ll continue to wait for more of them, but based on volume and volatility, MBS traders are taking this very seriously.

Econ Data / Events

Non Farm Payrolls (Dec)

50K vs 60K f’cast, 64K prev

Participation Rate (Dec)

62.4% vs — f’cast, 62.5% prev

Unemployment rate mm (Dec)

4.4% vs 4.5% f’cast, 4.6% prev

Market Movement Recap

08:31 AM Treasuries losing some ground after jobs report.  up 2.2bps at 4.194.  MBS up massively on the day still due to last night’s Trump headlines.

09:30 AM 10yr up 2.2bps at 4.194. MBS still outperforming, but sobering up and now only up 6 ticks (.19). 

09:49 AM Massive MBS volatility. More sobering up.  5.0 coupons now unchanged on the day.  10yr up 2.4bps at 4.195

10:05 AM Volatility continues. MBS back up a quarter point. 10yr up 1bp at 4.182

01:36 PM Volatility Continues. MBS were nearly back to unchanged, but are now back up a quarter point. 10yr down 0.5bps at 4.167

03:40 PM Calming down and holding a more sideways range with MBS up 7 ticks (.22) and 10yr near unchanged at 4.174