MBS LUNCH: After The Let-Down, Bonds Recover

Euphoria struck this AM not only with the substantially worse-than-expected headline jobs loss, but a slew of the report's internal components perhaps even more economically bearish than the headline itself.  The vertical line that shot straight up in MBS prices and straight down in bond yields was quite the welcome companion to many a morning cup of coffee for originators on the east coast and early risers on the west.

But then bonds were presented with a choice and harsh reality set in...

The choice goes back to the uncertainty we've been discussing recently, and that is whether or not the late December tanking in bonds can be chalked up in some proportion, to misleading seasonal effects, or if the new higher range emerged as an early indicator of where the market wanted to be set up for what we all know must necessarily be a 2010 with higher rates than 2009.

When both MBS and Tsy's approached the recent limits of that range, we got our answer.

A lot of the rapid deterioration in bonds this AM can be chalked to the meteoric rise out of the starting gate.  I'm sure if we were more content to keep you in the dark about the chopalicious nature of the markets and update our charts and commentary less frequently, a moderately lower stock market and a 6 tick gain in MBS and Tsy's would be a bit more palatable.  But no...

They just had to get our hopes up didn't they!?  We had to wake up to half point face-melter on what should have been a no-brainer reaction to NFP only to lose almost all of it before finally stabilizing.  Look at the charts now...

We've recaptured around 2/3rds of this AM's rally.   That ain't half bad, but the broader view of the week brings the 800lb gorilla into focus:

EVEN THE OSTENSIBLY HORRIBLE NFP PRINT WAS NOT ENOUGH OF AN IMPACT TO NUDGE BONDS OUT OF THEIR NEW ORBIT AROUND "PLANET UGLY."

What's ugly?  How about a range between 3.8 and 3.84 in tsy's (outer limits at 3.75 and just over 3.85) on the heels of sub 3.56 ranges for many previous weeks?  Yeah... ugly...  But given the recurring theme of the runaway freight train of economic recovery, whether fueled by PERCEPTION, stock indexes, and in distant third actual factual data, it was an eventuality that couldn't be completely dismissed even in the face of a "worse-than-expected" NFP. 

That was the theme for almost the entire half of 2009, and it remains.  Whether it be the "trader's world" or whether we're "playing the range until the range plays us," prices movements within those ranges have required something with enough force and significance to push them out of the range.  So today the market tells us that despite the negative NFP, it didn't carry enough force to break definitively through the range. 

But there are ranges and then there are ranges beyond...  3.80 is one thing and 3.75 is another.  With the less than emphatic reaction in bonds, we're dealing with a bit more remaining indecision than we'd like.  It's possible that 3.80 holds strong through the day and into the next week.  It's also possible that bonds can ratchet higher in price only to meet the real resistance at 3.75 yield. 

So for now, what we know is that it either would have taken an EVEN WORSE NFP to get bonds definitively out of the range or perhaps was never even possible against the backdrop of the "freight train."  But we at least know that bonds shied away from weaker levels after failing to break the stronger ones.  Range-bound and waiting for guidance?  I almost hate to say it, but it's the best way to describe where we are.

AND YES!  NFP SHOULD have provided that guidance, but AT LEAST FOR NOW, the market is telling us it has not...  And it wants more...  It always wants more.