MBS CLOSE: Bond Markets Weather Storm Of Unfriendly Data

By: Matthew Graham

If you were around much over the last 3 months, this week should look familiar.   The patterns are, for the most part, similar, though this week's perfectly confined sideways slidin' occurred wihtin an even tighter range than technically bouncy periods of yore.  And though you may as tired of hearing it as we are of continuing to rely upon it as an explanation, technical ranges continue to dominate the tradescape with nothing more than some courtesy choppiness to pay lip service to particularly extreme economic indicator readings.   Whether we look short, medium, or long term, techs are everywhere, maybe even a fractal* or two?  In other words, the paradoxical digressions of prices from the movement suggested by data become more and more understandable in this context.  This week in particular is one of our best examples so far as the data was noticeable skewed toward the bulls, and stocks reflected that, but for bonds, just another choppity sloppity slap chop between the pinball-machine-like support and resistance "bumpers."

 

(i know you already saw that chart, but prices didn't move enough in the last hour to justify another)

As you can see, both MBS and Tsy's show similar behavior.  But you also might remember that we've argued in the past that MBS don't lend themselves as well to technical analysis as other instruments.  Of course tsy's are one of those instruments, but even more so Tsy Futures.  The picture there is just as brutally slappity dappity chopalicious.  Or to rely on a more simple term with slightly fewer syllables while still managing to stay a mile away from professionalism on a Friday evening...  Bang, bang, bang anyone?

I know it might be somewhat obscured in the actual picture, but all the red circles mark days where either the open, high, low, or close was within 3 ticks of that range.  Particularly, the last 3 days in conjunction with 8/31 and 9/9 have either opened or closed on the lower line with ruthless brutality.  Did MG just say "ruthless brutality in reference to the bond market?  Why?  Basically, the fact that these levels have been so regular is just brutal at this point...  I mean, I come into work in the morning thinking about 116-26...  I light some incense and speak a few incantations to the bond gods in the hopes that prices can be released from their exile in the ethereal valley bordered by the mountains of 116-26 and 118-01, but again and again, closing prices continue operate in the same range.  In the sort of colloquial way you might comment on a someone frustrating yet comical plight of a good friend over drinks: "that's just brutal man...."

But don't worry too much.  Things won't be this confined for long.  whether it's range-finding, seeking of directional guidance, consolidation and distribution, or whatever, the one thing the markets almost certainly will not give you is a flatline.  So what happens now?  Same story as always.  The trend is your friend until it's not anymore....  Buy the dips, etc...  In English, do your best to be floating a bit more near the lows of the range and locking a bit more the closer prices are to the highs of the range.  Once the range is broken, we reevaluate and go from there.  And if that sort of big picture  strategy isn't good enough for you....  If you want to know what MBS prices are going to do with much more specificity...  If you don't want to give up the ysp here and there in order to be more profitable in the long term....  If you want to have your cake and eat it too AND be able to shoot lightning bolts from your fingers, you might want to order an advance copy of my yet to be intelligently conceived book: "The Fractal Nature Of The MBS Market."

(yes, you've now officially crossed into the utterly sarcastic and overly comedic portion of the Friday PM commentary, so feel free to leave if you don't have a sense of humor, or aren't just a little bit curious if an element of truth or reality might, in fact, pop up amongst the insanity....)

Basically, I have these Rainman moments where I just kind of black out and wake up knowing the exact amount of matches on the floor.  This has been happening in glimpses here and there regarding the day over day price curve in fannie 4.5's.  I actually mentioned this a couple times in previous blogs, but  I had another one of those black-outs today.  For those with more important things to care about, a fractal is a non-traditional "geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole" whole " [1].  More for Friday night entertainment than anything, but also because 3 or 4 of you might actually want to sit and scratch your head over this one, I'll leave you with the following chart to ponder.  There's no "right answer" or firmly suggested outcome here.  But I suppose I would be greatly interested to hear any deep thoughts on this because as far as I know, no one cares about this except me...  By the way, the tsy and stock part of the chart below is just so you can see what was happening over the same time frame.  The fractal discussion is only on the MBS chart.

 

MBS, Tsy, and LIBOR Quotes

 

1. Mandelbrot, B.B. (1982). The Fractal Geometry of Nature.