MBS CLOSE: Erasing A Month Of Gains
MBS weathered today's storm fairly well. The FN 4.0 went out the door -0-14 at 98-26 yielding 4.124%. The FN 4.5 ended the session -0-09 at 101-17 yielding 4.313%. The current coupon moved up to 4.219% at "going out" marks on Friday, up almost 25bps from the prior week.
In addition, the support levels seen today were encouraging. This month's NFP had a lot riding on it and the end result was among the better options available. Of course the best turn of events would have been to see an unchanged or weaker jobs print that brought rates back to the absolute lows of the range, but with the 10yr stopping at 3.38 yesterday, the market was essentially telling us it was ready to go in either direction, and go big.
That meant that although the risk was there for longer term ranges to be broken that 3.5 on the high end and 3.27 (ish) on the low end were both viable candidates. If we had seen stocks surge today, we could have easily seen a push out to the outer limits of the range--points at which yields have only briefly traded--such as the 3.57 area. That would leave us with no room to run over except for maybe the 62% retracement between 3 and 4 percent at 3.62. Not nearly as comfortable of a place to be as 3.48, the highest levels reached for the longest period of time over the past several months, AND to have that range supported in grand fashion by grand volume.
In that sense, it's a bit of a "reset." As yields pushed lower from that 3.48-3.57 support in the month of novemeber, we went all the way from 3.48 to 3.2. I think that we would have had to have seen a ridiculously awful NFP to justify even remaining at those levels let alone break them. The slightly stronger than expected NFP was essentially a vote to undo the entire push from 3.48 to 3.2--a RESET that strikes novemeber's rally from the record books and see's bonds "starting over." But rather than start over in a tenuous 3.57 position, the markets voted in high volume for 3.48. That meant that a huge contingent of today's flows thought this was more than acceptable place to potentially capitalize and/or put cash to work into year end.
For lack of a less redundant way to describe things, we simply shifted from one range to another, and thus are right back to the same mindset we had when the previous range was in play. The previous range? something like 3.31 to 3.48. There's one range higher from 3.38 to 3.57 and one range lower from 3.2 to 3.38. The latter is the most recent experience, but not one that usually lasts long. And it's interesting to note that the mid point of the middle range is also an outer boundary of the outlying ranges. In this way, ahead of the NFP we were set up in truly the most neutral position available, the only level that has business with all 3 ranges.
The trick now will be determining which range we'll call home next week. We're either looking at that 3.57 to 3.38 or the more bullish 3.48 to 3.31. If the volume that rose in support of 3.48 has it's way, and we can evade any tape-bombs, the chances are good for the lower range.
But in order to make any meaningful claim to the lower range, 3.38 would have to be broken before we can rule out that we're in the MIDDLE of the higher range as opposed to the TOP of the lower range. Completely disregarding the ongoing disconnection of the stock lever, I can't help but think that momentum in stocks plays a role here with indexes at their annual highs. If those highs continue to hold as resistance, it makes a case for a better range in tsy's. Today, despite breaking that resistance intraday, those annual highs eventually held up to complete the 2 week range-bind in the S&P. And so it is that one of the most linear bull flags in recent memory hints that stocks have yet to cast their vote. Look at the chart below.. Does it look like anything conclusive made it's way to stock trading today?
That's helpful for bonds, at least for now. Also historically helpful have been treasury auctions themselves as opposed to the announcing of their amounts. Those auctions are coming up next week and promise to be the most closely watched ongoing event. Certainly they'll play a big role in helping us decide which range to call home through year end.
As far as traditional economic indicator data, the first part of next week is a dud. Instead, we're treated to Bernanke speaking to the Economic of D.C. But his prepared remarks have been scrapped and they're just planning on throwing darts at a picture of Jim Bunning I hear. Nothing else of note on monday, so we'll be focused on gleaning any significance out of the conversations around the dartboards. AQ and I have some parlor tricks prepared that involve a lot of training on my part to take a dart to the forehead without flinching. So hopefully I can maintain consciousness long enough to overhear something. If not, AQ SHOULD be relatively unpunctured at that point.
No econ of note on tuesday or wednesday either, but auctions will have kicked off with the 3yr on Tuesday. By the way, yes we realize there are some scheduled reports on those days as well, but none that we particularly care about compared to the auctions.
It's been a wild ride coming into this NFP, but hopefully you were able to catch at least one of the 47 or so posts over the last few weeks that said something about "yes, keep locking even as we add on incremental gains!" My favorite was probably last night's where AQ, with nary another word within several lines, simply wrote : LOCK!
It was a most felicitous outburst I thought, but not the only one in our repertoire. So tune in next week for a chance at hearing the others!!