Buy the rumor, sell the fact: Rates rise on European asset purchases

Bonds continue making strategists look bad

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.

The information in this series will be relevant to mortgage real estate investment trusts (or REITs) like American Capital Agency (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).

Buy the rumor, sell the fact

There’s an old Wall Street saw that says you should buy the rumor, sell the fact. Essentially, this means that the market prices in an event before it actually happens. Once you get the event announcement, people begin to unwind positions. This means you often get the opposite effect of what you think would happen.

That was the case this week, as the ECB (European Central Bank) officially announced asset purchases (in other words, quantitative easing). Bonds had rallied hard ahead of the announcement, so once it was made official, they actually sold off.

On our side of the pond, the consensus 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. For what it’s worth, David Tepper of Appaloosa Management declared the bond bull market officially over last week.

Outlook

Overall, the recent economic data has been pointing towards a strengthening economy—not a weakening one. But housing remains stubbornly depressed. The first-time homebuyer remains over-indebted with student loan debt and faces a tough job market. But 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.