MBS LUNCH: Perspective Amidst Reprices For The Better
Any time charts start to take shapes similar to those seen above, reprices for the better are usually not far behind. One thing we continually mention is the necessity of a stock market correction in order to validate any meaningful gains in the bond market. Though stock losses today and Friday (if you could call them that) are nothing to write home about. Overall, the improving range for stocks is not in jeopardy yet.
There ARE some ranges that might be in jeopardy and are currently being tested: MBS and tsy's (for the better). But as you may recall, we should be hesitant to treat this as any sort of indication about the future unless the current levels hold strong and even improve a bit further over the next few days. EVEN THEN, considering some of the fundamental backdrop this week combined with the inherent price drop from settlement that's just around the corner, I might be more hesitant than normal to draw any conclusions based on PRICE levels. Still, even if these gains prove to be fleeting, it's nice to simply be ble to say the following phrase: best levels for over a month.
You can see that tsy's are pushing past a floor that's been repeatedly implied since August 19th, and that MBS have only spent a few hours at higher levels since the first part of July. The big variable with all of this positivity is whether it is making the chances of a technical tretacement that much more likely, or if it is in fact, an early indication of shifting sentiment. Fortunately, we've already been over this section of the playbook, remember? This is that play where we only assume the offense is making a run for it AFTER the running back crosses the line of scrimage. In english for non-football fans: In the absence of blatant causality, we shouldn't draw any conclusions on current technical levels until those levels have been broken by a significant amount and for a significant amount of time.
This might look like the 10yr going below 3.4 and holding it for a day or two. But you know how that goes... Because of the market's predisposition to make as many people wrong as possible, just about the time we began hoping for a shift in the stock lever, we'd get some ridiculous reading on NFP and get crushed in bonds. And we could go back and forth in our own minds all day long on the "yeah buts..." (I know I usually do anyway...).
At the risk of overusing a cliche lead-in, the moral of the story is that one of the only empirical truths in recent months has been the strikingly well-behaved range trade. And though we're inching out of that range to the upside, so too have we inched for a few brief periods (7/31 and 8/7 ish...) only to return to the more frequently occurring stops in the range. Don't get me wrong, I DO hope this time is different and this is the beginning of a broader shift in prices, and I DO hate to be a party pooper, but the football play analogy used above was written from the point of view of the DEFENSE for a reason, for it is that half of the eternal dichotomy that should continue to inform our decisions until the ball is moving decidedly in the other direction. Feel free to be optimistic, but don't tune out and simply wait for awesome rates. Keep a careful eye on your improved rate sheets today for any awesome deals, and if you need objective support for moderation, consider that 10yr futures are at the exact same levels they were on the 21st, right before falling to their lowest levels of the entire 2nd half of August.
Plain and Simple: today's rally doesn't constitute a shift in trend, so don't get complacent in terms of evaluating YSP, pipeline allocation (lock/foat %s) and client specific considerations, but for the love of MBS Gods, whatever rain dances y'all did this AM, KEEP EM GOING!
MBS, Tsy, and LIBOR Quotes