October 25, 2018

Stocks are off to a strong start in the AM after falling hard in yesterday’s exchange. Economic fundamentals remain sound; however, jitters on Wall Street are palpable due to increasing interest rates, and rising geopolitical/trade tensions. The S&P500 is currently trading at 2,686.50, 1.14% higher, the first positive session for the S&P index in seven days.

Treasuries are moving lower to begin Thursday’s exchange after a nice rally on Wednesday. Safe-haven assets caught a bid this week as global equity markets violently selloff. Sentiment remains muted in equities although the majority of S&P500 companies have beat on earnings. The 2/10 spread has decreased by 1bp so far this week to 27bps. The US 10-YR Note is currently trading at 3.1356%, 0.0321 higher.

MBS Performance and Volumes

MBS badly lagged the flight-to-quality rally in Treasuries on Wednesday. 30-year Fannies trailed their 10-year hedge ratios by 3-7 ticks, with Fannie 5s (which had started to see a pickup in volumes) the worst performer. Ginnie IIs also underperformed 10s, with both GNII 3s and 5s lagging by 5/32s while 3.5s-4.5s underperformed by 4 ticks. 15-year Fannies underperformed the 5-year note by 3-5 ticks, with Dwarf 3s and 3.5s having the toughest outing. Trading volumes were relatively light, with a total of $144.7 billion in trades including about $9 billion in specified pools.

TBA MBS’ are little changed in the AM after notching a sizeable gain in Wednesday’s exchange. Pending home sales came in stronger-than-expected this morning, notching a 0.5% MoM gain in September versus analyst expectations of no gain. On a YoY basis, pending home sales fell 3.4%. Liquid coupons are currently trading 1+ tics lower.

The USD is trending higher to begin Thursday’s trading session, notching gains against the EUR and GBP after Mario Draghi addressed market participants earlier today. The DXY is currently trading at 96.60, 0.24% higher.

Oil is searching for direction in the AM as investors digest the latest rhetoric from OPEC. WTI is currently trading at 67.02, 0.30% higher.