MBS Prices Likely to Continue Declining
MBS prices were hit hard again Monday by strong manufacturing data, suggestive of still further growth to come. Both the ISM Manufacturing Survey, and the PMI Manufacturing Survey for the US showed better-than-expected strength in November, and that put a lot of pressure on MBS prices. Prices had opened worse on the day before any of the US data came out on similarly strong data from Europe. By day’s end, the result was a 50 basis point loss in MBS prices, while the 10-year Treasury yield jumped higher to 2.80%.
Wages in Japan continued their year-and-a-half fall, down 0.4% in October at the base level, although overtime and bonuses brought wage gains into the green. Much of the increase in bonuses and overtime was in the manufacturing sector. India’s current-account deficit fell in the 3rd quarter, down to just $5.2 billion from $21.8 billion in the prior quarter. A tax on gold imports was seen as a driving factor in this. Standard and Poor’s upgraded its opinion of Cypriot debt to B-/B yesterday, citing reduced risks, but at that level, the debt remains highly speculative. The number of unemployed in Spain fell 2500 in November, the first decline in that month since 1997. The improvement barely scratches the surface of the 4.8 million unemployed there, though. Wholesale prices in Europe fell sharply in October according to the PPI, down 0.5% on the month, where a smaller decline was anticipated. Wholesale prices are 1.4% lower today than a year ago.
There is no US data of any consequence today.
MBS prices are slightly better this morning, rebounding from yesterday’s heavy selloff, as there is no news of consequence to pricing domestically at the moment. Foreign data, and some comments from Japan, suggest that stimulus measures will continue there, especially as base wages fall. Getting that number into the black will be very important to maintaining inflation growth, and that’s going to drive the Bank of Japan to consider further measures. MBS prices are out of their support range, though, as the recent price movement has pulled prices outside of the range of the recent moving averages – we’re now below that level altogether. This means that prices could very easily continue to get worse, meaning that locking is prescribed in most cases at this point. There will be more data coming tomorrow and Thursday, and that could help in restoring pricing if the data is worse than anticipated, but better data will have a chilling effect on fixed income.
<15 days: lock
15-30 days: lock
30-45 days: lock
45+ days: consider locking