MBS LUNCH: Attempting To Find Support At The Lows

In last night's closing commentary, we talked about the difference between organic directionality and technical stopping points.

"organic directionality" - in this context referring to the "of it's own accord" direction for MBS prices, whether that be a lot or a little.  Econ data bullish for the recovery?  Then ORGANICALLY, the suggested direction is weaker bonds.

The basic assumption is that fundamental data does a good enough job of getting markets "shoved off" in one direction or another, and once moving through time and space in that direction, various technical levels usually exert enough gravity for starship MBS to "dock" there at night.

Since we don't really know, as yet, where bond markets might choose to pitch their tent come closing time, we can at least focus on the first assertion which is this: despite the huge gains in relative importance on the part of technical price levels that showed up with the financial crisis' tsunami of uncertainty, the fundamentals continue to play their part, and play it well.  In other words, up is still up.  Down is still down.  And 2+2 still equals 4.

It's with those principles in mind that we see this morning's bullish reading on the Philly Fed and the suggestion of rising inflation from the productivity and costs report driving bond prices sharply lower.  In metaphorical terms, the heavenly body that is the bond market has been acted upon with great force and has begun moving in the direction suggested by that force hoping to get drawn in by the gravity from one of the neutron stars that represent technical price levels.  The more bearish the data, the more force behind the push, the more MBS fall.  And thus continues our second day of sizeable losses--pushed abruptly out of our previously complacent orbit defined at the limits by 100-04 and 100-19.

Looking back in time and space, there is past evidence that 100-10 was once a very important technical stopping point, so that may indeed be the line in the sand that MBS are able to draw.  That puts the fannie mae 4.5 11 ticks down on the day.  For Tsys, there has already been enough testing of the 3.8 level to be closely watching it as the preferred technical stop for today. 

With the losses having already hit us hot and heavy, and with reprices for the worse being old news, all we can do is watch this harmony of the spheres play out and adjust from there.  That bonds are weaker comes as no surprise given the technical and fundamental indications discussed in our weekly commentary on Friday or the fundamental econ from this AM.  Knowing then, as you hopefully do from reading such things (as well as yesterday's close), it's a simple matter of exercising your if/then decision making process.

MG and AQ say rates generally weaker.  If they're right, then I ________________.  Fill in the blank and act accordingly.  All we can do is say an unfortunate "yes, rates are continuing to show signs of gradual weakening into 2010," and keep you updated on any factors that can change that outlook, even if only temporary.  Hopefully there will be no further price weakness to report today, so we'll let you know if a meaningful correction is mounted.  Then, with the help of our forthcoming afternoon and closing comments, the tough decisions regarding overnight floats can be better informed.