MBS MORNING: Heavy Volume and Epic Battles

By: Matthew Graham •

The markets' reaction to NFP today is living up to all the hype so far.  Of course you're already aware of the negative implications in that bond prices are lower--much lower. 

  • 4.0's are down 23 ticks to 98-17
  • 4.5's are down 16 ticks to 101-11
  • 10yr tsy's are down 31 ticks, basically a full point, bringing the yield up to 3.491
  • 30yr tsy's are down over a point, 1-10 to be precise, bringing the yield up to 4.41

This is very much in line with expectations on a better than expected NFP.  As we discussed yesterday, MBS and Tsy's sought out their most frequently visited inflection/pivot points of the past several months.  We also discussed the numerous price and yield levels that can be suggested by the range trade and the fact that only a select few lie at or near the extremes.

With that in mind, yesterday's close into this morning is a good example of markets seeking an important level at the MIDDLE of recent ranges in preparation for NFP, and then moving out to the longer term absolute levels.  But first, here's what the drama looks like close up.

You can see the volume in the tsy chart above is off the charts compared to yesterday.  It's massive.  Also, the fact that tsy's begin getting "noisier and noisier" as they approach and touch 3.5 should be VERY significant to us as this has been perhaps our most frequent topic of conversations concerning the range trade in recent months.  As dealers continue to push yields as high as possible, value buyers continue to view 3.5 as a great entry point.  Thus the extreme volume, and perhaps even the sense that the worst of this morning's storm of price losses is behind us.

Now the long term charts showing where these levels have come into play in the past...  In MBS we can see that 101-10 served as brief support just as Sept. was drawing to a close.  Evidence for its significance is seen in the firm resistance it then provided throughout October.  In tsy's, 3.5 may well need no introduction.  It has been such a pivotal defining point of the range, but on several occasions it was broken and 3.56 had to step in to clean things up.

So the higher probability events will include if not outright OBEY the suggestions made by these epic levels.  That's a bit cloudy as far as tsy's are concerned as history would allow a test of 3.56, but for now, 3.5 looks to be giving it the old college try.

That notion is further supported, and in gorgeous fashion, by the futures market.  From mid-november on, 119-00 stands out as a clear base of operations for bond bullishness.  And that level now lines up with 3.5 and is standing arm in arm to support the range:

Meanwhile stocks broke upward from their ridiculously regular pre-NFP range.  It would be quite a bond-market boon if they found cause to get back under the upper trendline, but  even if they do, further confirmation would be required and indexes would have to rise much higher for the stock lever to be a meaningful threat to the strength of the range trade in bonds.

Bottom line... NFP came.  It saw.  It kicked one of the two potential posteriors, but after the half point beating in 4.5's and the full point beating in 10yrs, the playing field looks to be leveling.  This may give way to a firm show of support for tsy's at 3.5 in the coming days.  If that happens you might actually hear AQ and I say "float" for once.  Locking seems, indeed, to have been the order of the day until now though.  But if it's not locked yet, standby for further instructions as the epic battles over long term ranges continues!