Why bonds continue to make strategists look bad



Bonds continue making strategists look band

The roundup is a weekly series where we discuss the week’s trading in government bonds and to-be-announced (or TBA) mortgage-backed securities. We’ll see where mortgage rates have been. We’ll also go over the weekly economic data and earnings announcements. Then we’ll look forward to what’s coming up the following week.

10 year bond yield - LT

The information in this series will be relevant to mortgage real estate investment trusts (or REITs) like American Capital Agency (or AGNC), Annaly (NLY), Hatteras (HTS), Capstead (CMO), and MFA Financial (MFA). It will also be relevant to people who invest in homebuilders or fixed income exchange-traded funds (or ETFs) like the iShares 20+ Year Treasury Bond ETF (TLT).

Bonds rally on events overseas and weaknesses in Europe

Last week didn’t have a lot of stuff that could move the bond market, but bonds rallied anyway. Weakness in the Eurozone pushed yields lower and U.S. Treasuries followed along. Finally, tensions in Ukraine also caused a flight to quality which pushed yields lower.

After starting the week at 2.42%, bonds dipped to 2.30% intraday on Friday. They rallied to close the week at 2.34%. Next week we’ll get the Federal Open Market Committee (or FOMC) minutes. The minutes should be interesting to see if the hawks are beginning to gain some traction.

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The consensus on Wall Street has been for yields to increase as quantitative easing (or QE) ends and we get closer to the day when the Fed will start raising rates. So far, that call has been dead wrong. We’ll see if easing tensions overseas causes a bond sell-off. At some point, convexity buying will kick in. This could drive prices even higher.


Overall, the recent economic data  has been pointing towards a strengthening economy—not a weakening one. However, housing remains stubbornly depressed. The first-time homebuyer remains over-indebted with student loan debt and faces a tough job market. The lower rates are helping the real estate market somewhat. Mortgage origination activity is picking up.

In the next part of this series, we’ll look at trading in the TBA market. The TBA market is the basis for mortgage rates. We’ll discuss where mortgage rates have been for the week.


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