Mortgages were slammed on Tuesday as investors returned from the long holiday weekend. It was said to be one of the worst days ever for MBS with substantial widening driven by active selling, wider swap spreads and higher volatility. Liquidity was severely lacking as well.

Treasurys sold off sharply on Tuesday with the 10-year Treasury closing down 24+/32nds with the yield rising 9.5 basis points to 3.875%. The 2s10s was 3.4 basis points flatter at 183.5 basis points. Treasurys were hit from a variety of sources. Initially, equities rallied on favorable Wal-Mart earnings news, higher energy shares on higher crude oil prices and gains to homebuilder stocks on the improved sentiment suggested by results from the National Association of Home Builders index. Stocks gave back their gains, however, as crude oil crossed the $100 per barrel mark. Treasurys were also hit by the higher oil prices, along with convexity-related selling and growing concerns about inflation.

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