MBS performed quite well throughout yesterday’s rally, but gave up some traction following the $1.2B worth of 30-year Fed purchases. At 5:00pm, the FN 30 year 3.5% (Apr) was +13+/32nds (102-22+) and the FN 15 year 3.0% (APR) was +7+/32nds (102-24+). In Gold/FNMA swaps, FN’s outperformed FG’s in both the 3.5% and 4.0% CPN and both swaps ended the day in Fannie’s favor. In Ginnie 2 markets, many hoped that the start of the Japanese fiscal year would reignite demand, however they were left disappointed as G2 securities continued their underperformance.
Yesterday markets reacted strongly to a myriad of economic data and news. While headline manufacturing data printed in-line with expectations, the employment index increased by over 4.5 points and prices paid increased by 2.5 points causing the bond market to rally substantially. This latest data further supports that inflationary pressures are substantiating in the economy as employment and prices paid hit levels not seen since 2011. In Russia, markets were digesting a horrific attack in the subway system of St. Petersburg, where at least 14 people were killed and many more injured by an explosion.
On the day, domestic equities lacked conviction and ended up closing slightly in the red.
Treasuries rallied on the day driving the 10-year yield down to 2.31%, further supporting a resistance level which has been approached four times this year.
In Fed speak, Philadelphia President Harker, speaking at the University of Pennsylvania, reiterated his comments that the Fed should raises interest rates two additional times this year in order to avoid being “behind the curve” and then have to rush in drastically to normalize interest rates.