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Why this week will be key for REITs like Annaly and homebuilders

Part 3
Why this week will be key for REITs like Annaly and homebuilders (Part 3 of 6)

Why did bonds rally despite some strong releases and good news?

The ten-year bond is the building block for many important interest rates

The roundup is a weekly series in which we discuss the week’s trading in government bonds and TBA (To-Be-Announced) mortgage-backed securities. We’ll see where mortgage rates have been and we’ll go over the weekly economic data and earnings announcements. Then we’ll look forward to what’s coming up the following week. The information in this series will be relevant to mortgage REITs like American Capital Agency (AGNC), Annaly (NLY), Hatteras (HTS), Capstead (CMO), and MFA Financial (MFA) as well as people who invest in fixed income ETFs like TLT or in homebuilders.

10 year bond yield - LTEnlarge Graph

Bonds meander higher, perhaps as a correction to the prior week’s sell-off

Bonds meandered higher this week despite some decent economic data (notwithstanding the hideous new home sales report). The Index of Leading Economic Indicators was stronger than expected, and durable goods weren’t terrible either. Consumer confidence rebounded as well.

The prior week (the week of the Easter Holiday), bonds sold off on no real news. The markets were somewhat illiquid, and we had a short Thursday, with the market closed on Friday for the Good Friday holiday. Often, senior traders take off Thursday to make a four-day weekend and instruct their junior traders manning the desk to stay out of the way (trader jargon for “don’t take any positions.”) This means that the natural motion of trading desks “fading” or taking the other side of spikes in buying or selling is less, which can often mean out-sided moves that have no real explanation. That may have been what was going on the week before, and last week was the correction to that.

In the next parts of this series, we’ll look at trading in the TBA market (which is the basis for mortgage rates), see where mortgage rates have been for the week, and then discuss the past and upcoming economic data.

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