MBS LUNCH: What Can Wile E. Coyote Tell Us About MBS?
The FN 4.0 is currently -0-11 at 97-26 yielding 4.2248% and the FN 4.5 is trading -0-11 at 100-17 yielding 4.4376%. The secondary market current coupon is 4.3525%
Both the longer-term trends of the months past and the shorter-term trends of recent hours are suggesting the same outcome for bonds...
It would be nice if the outcome was actually higher or lower because at least we'd have an idea of how to trade the market. And though AQ and I tend to be a bit defensive ahead of looming Fed exit (wider yield spreads), among other things, there's no denying the range-bound chopatility that defines the trader's paradise. If you've ever found yourself wondering what that means and how we identify it, wonder no more. Today provides almost too perfect of an example...
Forget the arrows for the moment and focus on market movements. Taking an inventory of this AM's fundamental data, economic reports were noticeably bullish. True, Philly Fed missed by a bit, but enough to cause 10yr yields to drop from 3.47 to 3.41? Not likely. So from a fundamental standpoint, one would expect to see stocks rise and bonds fall in price. And although that's where we came from this morning, it wasn't what was happening after the 10AM hour.
Instead, the data is a clever tool employed by the "getting richer" to take as much money as possible from the "getting poorer." In the trader's paradise, there is the illusion that markets are responding to data, but just when you're getting happy about the directionality you so expertly predicted, someone walks up to your portfolio and asks, "what did the five fingers say to the face?"
SLAP!
And the .375 point sell-off in MBS that seemed logical on the early data is erased in fractions of a second, as a full half point is packed on in less than an hour. To make matters worse, you didn't get on the "bid boat" in time for the rally because you saw the Philly Fed as worthy of only a minor correction. Never could it spark a half point rally in light of this AM's data... A half point later, the market has you second guessing your assumptions... "Crap, maybe there is some extra caffeine in the bond bulls coffee today... Hmmm... That rally looks pretty steep, and we're not even near recent highs... Might as well get on board and cash in a bit..."
But just when you get on the bid boat, here comes that cruise missile from the general direction of Trader's paradise... SLAP! (bet you didn't know that's the sound a cruise missile makes when it hits the bid boat... not a coincidence)... 101-00 falls to 100-21... that's 11 ticks. You just got sucker punched for the better part of three eighths! But you're nobody's fool! You've learned your lesson! And after you sell immediately to avoid the rest of the fall down to the lows of the day or worse, here come those five fingers again...
SLAP! At this point you're hurtin'... But it gets worse... As you now see 100-21 as a decent low, it feels safer to get on board with this rally which made tick-to-tick "higher lows" and "higher highs" (good sign of a trend). You get back in the game and are waiting for that magic 101 number to cash in so you can stick it to some other poor sap like it got stuck to you. No dice my friend... Trader's Paradise is one step ahead of you. So this time the selling catches you snoozin' with an alarm that's set for 101-00. When the selling kicks in at 100-29 this time, you never even saw it coming...
You're done... You finally figured out how to win! If you just stop now, you can catch a decent offer when prices get back up near the highs on the next gyration. You'll even be smarter about it this time and infer a stop at 100-26 which would be a logical 3 tick stairstep down from 100-29, itself 3 ticks down from the original peak... Good plan... Wait for the 100-26... Not planning on getting greedy... Just take the the basehit and call it a day... But they know something you don't know...
At almost the EXACT time that one would have to shut down screens to get out the door at noon, prices are at their lows of the day again. And like that, POOF! They were gone... You can wait and wait for the varsity squad to come back and get the score back up to your profit-taking sell point, but the next time you see them will be tomorrow morning at 8AM, granted, you might not see them that well with the concussion and black-eye from the beating you just got.
And for a moment, it will be like Wile E. Coyote and the Roadrunner punching in for another day of ostensible uncertainty... And though both parties know they will be competing, only one already knows the outcome. Yet you keep clocking in, day after day...
(more on this in tonight's close, and a discussion of how it ties in with the arrows on the charts above)
Oh, and in case it wasn't clear from AQ's morning and the above analogy... We continue to bounce within a range motivated by technical price levels and tradeflows.