MBS CLOSE: Weathering The Year End Storm
Whether the fact that MBS prices ended UP on the day by 3 ticks is indicative of the passing of the year end storm of losses and volatility, or merely the respite afforded by the eye of storm, The MBS tower of hope is still standing. Hope for what? A calmer pace for price losses? Potentially even a correction to the upside? As much extra time as we can get working with rates in the mid to high 4's?
However you define the "better than hoped for" scenario in MBS, today did not crush that hope, though it also did little to bolster it. What little bolstering there is, one might infer from the long term chart that had quickly rushed to meet the low end of the range yesterday, that the tiny tiny bounce that began to form today may actually turn out to lead us back into the confluence of these two ranges.
But of course, "confluence" is such a gentle sounding word.... These lines will meet and MBS prices will necessarily be "squeezed out" on one side or the other. That's what happens when we draw a triangle. No surprises there. Let it also not surprise you that reality would need to be fundamentally altered--nay, the very fabric of space-time catastrophically ruptured in some way in order for the big squeeze to leave MBS decidedly above the upside resistance. Why would it do that when it had much more cause to in the first half of the year and didn't? That's right... It wouldn't...
So all of this to say that today's gains, any "bounce" that develops from this resistance, or any other cautiously positive price movements in the near term all do more to suggest that MBS is living to fight another day as opposed to undergoing some underlying shift in sentiment. But hey! We'll take it while we can get it!
In tsy's, remember that today was our day to assess a potential range breakdown of 3.56-3.57. AQ nailed it this AM and indeed we closed over that pivot point by a few bps at 3.598. Whether or not that 4 bp breakout is something you ultimately think is significant, you'll likely have a decent amount of company on either side of that debate. In other words, the breakout certainly meets the rules for "confirmation." But considering year-end, and the anemic follow through of the breakout, no one could fault you for saying "yeah, but... let's wait and see how this thing plays out in the new year."
Smack the above red line in just the right place and it tilts with an upward slope to connect Q1's high yields with recent low yields ("internal trendline"). So that's a slightly more bearish way to look at the trend, and perhaps one that deserves equal attention. But my decision for tonight was to highlight the almost questionable ferocity with which yields backed up in confirmation of the range breakout.
On the final "questionable ferocity" topic of the night, note that ranges narrowed INSIDE yesterday's trading ranges. No commitment here, and little changed from the afternoon post.
That leaves us either to CARE about data for the rest of the week, thus reacting to it with price direction, or to begin the process of tuning out for the many market participant vacations starting this weekend. Watching volume, volatility, and directionality over the next two days will be all we have in helping decide between the two. It's not like it was the beginning of this week where we knew ahead of time that a big market moving event was coming... This time, it will be up to the data and the market's reactions to let us know if we should care or not.
Oh, there is one other topic of "questionable ferocity." As always, we have some killer cliff notes on the FOMC statement itself. (AQ does such a good job on these... It's been a long day I know, but I urge you to read it). Use the comments tonight and early tomorrow AM to discuss the statement and whether or not you agree that there is any ferocity to the economic recovery, or if parts of it big picture continue to be questionable.