MBS AFTERNOON: Bonds Bounce Back As Stocks Sink

By: Matthew Graham

Whether it's the normal post-significant-data-event chopatility or something more directly connected, stocks may be the saving grace for bonds today.  Before we go any further, you should know that reprice risk has all but vanished at this point due to the correction.  We've neither broken highs or lows at the moment, so uncertainty remains, but if you were stressed about reprices for the worse, movements in recent minutes should afford you some relaxation.  Or should it?

Speaking of those movements...  You can see in the charts that neither MBS or Tsy's much cared for the FOMC announcement at first blush.  We'll discuss the announcement itself in the close tonight, but for now we'll focus on the more timely matter of market movements.  MBS sold about a quarter of a point immediately following and tsy yields backed up over 4 bps. 

We've been noticing in recent days that bonds seem to be "paying attention" to stocks, even if they are not in outright "stock lever connection mode."  This time around, bonds seem to be more sensitive to stocks' commentary on the broader recovery and long term trends.  For instance, when stocks moved decidedly above their annual highs at 1110 on the S&P, a period of intense selling followed in bonds.  Conversely, ever since stocks began to rapidly erase their gains today, Bonds have been able to entrench themselves at support levels of 100-24 in MBS and 3.6+ in Tsy's.  The chart tells the story.

Zooming out a bit, we can see why this particular drop in stocks might be attention-worthy.  In short, it's that same old top-side of the range / annual high level.

So perhaps a broader technical and psychological inference is being made about a stock market that refuses to go above 1110.  If upside breakage looks to be at risk, then bonds look weak.  But when stocks move decidedly back into their recent range, bonds are then able to hold theirs.  Whether or not that's the actual cause and effect of the situation is uncertain, but the behavior is in line with that assumption for now.

This correction and the "LESS BAD" levels it created in the context of the weekly charts has served to keep reprices for the worse much less prevalent than they were first at risk of being.  To whatever extent these longer term ranges hold through the close, the more possible it is to make it through the day without seeing a reprice. 

No decided vote for either direction there in MBS and still very much in the middle of the weekly trends.  In tsy's it's much the same as today's high yields are within the highest and lowest points so far this week, but certainly nearer the highs.

3.60 has taken the spotlight today as opposed to the 3.62 yields from yesterday.  3.60 is also the 3pm mark that holds significance as the first "close" of the day for Tsys. 

Between now and the next close, let's keep an eye on stock movements.  The S&P will likely think about correcting near today's opening levels or yesterday's close.  If that happens, the suggestion from recent analysis would be for bonds to worsen.  And if THAT happens, reprice risk is still alive.  All that said, there's not much time left to trade today and the more significant factors governing impending movements are likely yet to come in what many on the street view as the unofficial final two days of the year.