MBS CLOSE: On The Doorstep Of A Brave "Old" World

When something is on a doorstep--any doorstep--there are only two places it can be going: either back inside the metaphorical house, or back to the world outside.  Bonds, as represented not by our namesake MBS, but by the 10yr Treasury note, find themselves in just such a dualistic state this evening.  They too, are on a doorstep, their location being most perfectly defined neither by the "outside" or the "inside."  when we are talking about outside versus inside, it's in reference to the range in which the 10 year treasury was trading between August 21 and December 14, 2009, "the brave old world."

These four months represent a unique time in the economic history surrounding the financial crisis.  it was a unique time in and of itself in that we were neither rising meteorically off the record lows in January and February, neither did we find ourselves flirting with the 4% level during the summer doldrums.  in a real sense, this was the first time in 2009 but the market got a chance to simply "be."  Things were still weak enough that backing up into 4% wasn't a meaningful risk, but the recovery was enough of a possibility that we were not testing the 3% level either.  During any other period in 2009, you point to SOMETHING and explain away some sort of extreme movements of the curve.  But not during these months.  It's no wonder that the notion of "THE RANGE TRADE" grew to dominate the markets, and consequently, our analysis.  This was the quintessence of "uncertain and waiting for guidance."

Then December came and regardless of the proportions in which we allocate causality for the sell off, at least we can agree that bonds sold off.  Maybe it was related to something seasonal or some year-end tradeflow considerations, but maybe a sentiment shift was trying to take hold as well.  Whatever the case, after breaking 3.56-3.57, we were not to see it again for nearly two months.  Late December through today has been something much more than an exception to the rule of the 3.2 to 3.56 range.  If we do have a chance, next week, to make it back inside that range--back inside that "house"--it's very likely that we've just spent the last almost two months "house shopping." 

In other words, unlike those time frames from the later third of 2009 where we see temporary deviations from the core of the range (dotted lines) correct rapidly back toward the center, it would take a meaningful and sobering  correction in the stock market AND in the the sentiment surrounding the recovery, quantitative easing, and the like.  I'm not sure the stock market can muster that level of sobriety!  We've been hearing it's claims to that end for a little over a week now, and although it's certainly not back to its old ways (read: freight train), it's sudden and inconsiderate outburst (read: 100% retracement in last 2 hours) at least HINTS at caution when EXPECTING the correction that even some bulls think is coming. And while it's true that the massive rally at the end of the day did little to change to big picture for stocks, could it still be a hint of the same "never say die" attitude we saw the last two times the index broke long term trends?  Could it even a be a hint that the IMF will come up with the Grecian formula that mitigates some of the sovereign debt panic?  I think it's time I had a heart to heart with the S&P.

I couldn't type the rest of what I told it as I thought it might be too poignant.

There can be no doubt that bonds and MBS alike have performed admirably of late.  But a 10yr yield that operates under 3.56 for any meaningful length of time is not something we can safely assume will show up in 2010.  If you were just tuning in tonight for the punch, pie, and "just tell me to lock or float," stay with me here.  We're NOT talking about today being the last day for good rates for ever and ever amen.  We're talking about the bigger picture--about what it will mean if that door to that old house--that brave "old world" actually opens for a visit.  But barring the colossal double dip, that's all this can be: a visit. 

Ride the waves while they're breakin' sweet, friends.