What happened yesterday?
Mortgage backed securities (MBS) lost -64 basis points from Monday's close which caused pricing to worsen (higher mortgage rates). From November 1st's open to yesterday's close, MBS have lost -86 BPS so far this month.
Our benchmark FNMA 3.50 November mortgage backed security (MBS) was under pressure in early trading (-20 to -25 BPS) as traders speculated that the ISM Servicing report would be stronger than expected. Were they right?
Yep. The ISM Non-Manufacturing report measures growth in the servicing sector which accounts for up to 2/3 of our economy. It was indeed much stronger than expected with a reading of 55.4 vs consensus estimates of 54.0. A reading above 50 shows economic expansion. This reading coupled with last week's Chicago PMI and ISM Manufacturing is showing much more strength in our economy than originally thought. And of course, that is always negative for bonds.
The 10 year Treasury note had a yield of 2.6562 just before the ISM release and moved upward to 2.6709 just after the release.
As a result MBS sold off, breaking through our floor of support located at our 25 day moving average:
This is important as the 25 day moving average is normally very difficult to crack. The fact that we broke through it and stayed well below it is not a good technical signal.