MBS CLOSE: Another Day Between Us And Summer...
Generally positive, with significant downside risks in the short-term, with more uncertainty than normal... That's how I'm about to describe the outlook for MBS and fixed income in general over the next 6 months. Perhaps it would be more appropriate to say that's how one could have described the outlook starting this same week over the past 3 years...
Of course there's no such thing as a "sure thing" when it comes to planning for the medium to long terrm future of interest rates, especially mortgage rates post-meltdown. But to whatever extent we're increasingly RE-connected to the yield curve--and we'd argue the positive correlations are once again significant--and to whatever extent the yield curve has exhibited certain tendencies with much better than random probability in years past, present day parallels to trading days past will help you synthesize your own outlook.
Exhibit 1:
Yeah, you might have to look at it a few times, but it's not as complicated as it might seem at first glance. Green circles center on late Junes over the past 4 years, and (you guessed it!) yellow circles some time in the first 10 days of September and red circles some time in the middle ten days of October. Actual tolerances are even more impressive. June dates for instance range from the 22nd to the 28th. Something's going on here other than random chance...
The point of showing it to you? A vast majority of the time, the annual lows in bond prices fall on the warm half of the year versus the cold half of the year. And at least over the last 3 years, those lows have all fallen on the same week. But as I entered one of my characteristic chart analyzing trances I began to see the charts like Neo sees the matrix. They told me something. Ok, well, this had more to do with boredom, lack of sleep, and excess caffeine, but if that's your reality too, then this should still be pertinent...
Anyway... In the yellow circles, prices took a turn 3 out of the last 3 years (2006 is a stretch because it's so minimal, but then again, so was the volatility... exagerate the highs and lows and it would look fairly similar to the other points on the chart). These fell within a similarly small time window. And finally, after the move lower in the yellow circles, prices made new lows in ANOTHER narrow time period in mid-October. It even manages to hold true despite some earth shattering fundamental data in late 2008. Then in the rest of the respective years, it's plain to see a push back into the annual high range during "the cold months."
Now, before you go planning all your locks for the next 20 years, there of course, are caveats aside from common sense. First of all, the characteristic "bulge" this winter coincided with the brunt of the crisis, making a case for that to be a historical outlier and for fixed income prices to be potentially higher than they might otherwise be during the 80% of history that constitutes 20% of the price volatility. Getting up to 130 again may be a no-pun-intended tall order, but it doesn't mean you might not allow for some positive thoughts to enter your 6 month outlook.
If you've been around for the past few days, it was hard to miss the discussion on the technical implications of breaking recent price ceilings in MBS. And you know those "even more important ceilings just overhead?" Yeah, well we're there as of today. Additionally treasuries are there as well as can be seen in the charts above. The historical suggestion is for another breakout here, but until that actually occurs, our MBS groundhog might see his unfinished keg still on the beack and we'd have the dreaded "6 more weeks of summer." Let's see... Early September to mid October is about 6 weeks eh? Too weird!
Point? We'd still be able to adhere to historical norms of generally rising in price into winter EVEN IF we had 6 weeks of sideways, stagnant, or even negative price action in bonds. Rather than suggesting this WILL BE the case, I'd rather point out that although we broke the intermediate overhead resistance in MBS over the past few days, the next (and more important) ceiling was reached today. REACHED, but not broken. So there is no vote in cash market tsy's or MBS to move higher from here without some ridiculously bad data. Even then, after the last few days of being an equities index, I'd probably start drinking just to remember what it feels like to rally before calling it a night.
But as if you don't have a tough enough night of staring at your ceililng with squinted eyes, nodding your head and saying "hmmmm....." already, futures would like to throw you a curve. With the apparent overnight shift that occurred as summer arrived would and a similarly abrupt shift (with no regard to data mind you!!!!!) occurring not around, but actually smack dab, dead-center ON the 2 days marking the transition from August to September , would it really come as such a surprise that the entirety of summer trading, TO THE DAY, fits inside one, neat, horrible box of fiery death? With the exact same entry and exit points on the exact first and last days of the three month period? I'm not even going to offer any analysis on this one... You can just show other LOs the chart and watch the seizure sponsored hilarity ensue...
The point of this most recent rant? Because of the extremely technical nature of the summertime price action in MBS, how reasonable would it be to expect that the recently broken ceiling might now act as a support underfoot? No... YOU tell ME! I got nothing...