Bond yields tick up as hedges play the redemption trade



Why follow the weekly Realist Real Estate Roundup?

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 homebuilders.

10 year bond yield - LT

Bonds sell off thin volume during a holiday-shortened week

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Last week was the New Years holiday, and most trading desks were staffed by junior people told not to take positions unless they had to. We started to see some hedge funds playing the redemption trade late in the week. Hedge funds were buying the long end of the curve, knowing that fixed income funds were getting redemptions and were forced to sell. The bet is that bonds will rebound once the selling pressure is over.

ISM report comes in strong

The December ISM manufacturing survey came in at 57, lower than November, but still higher than Street forecasts. Manufacturing is still reasonably strong, and its strength bodes well for the economy going forward.

Good housing data

The Case-Shiller index of home prices rose 13.6% year-over-year, the biggest gain in seven years. Increasing asset prices are helping drive the de-leveraging of the U.S. consumer, which is another important trend that will drive the economy going forward

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 past and upcoming economic data.


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