MBS CLOSE: Stunning Display Of Courage Under Fire
"Little Engine That Could" status certainly has to go to MBS this week. Like the rest of the fixed income market, after a largely positive 2 weeks, MBS came under heavy fire today with the better than expected NFP print. When that happens, bonds of all shapes and sizes head south in a hurry, but to a much greater extent than treasuries, MBS fought back hard.
What does that mean? Take a look at how MBS are definitely rallying from 1030am onward and even return to yesterday's range, whereas treasuries just seem to fizzle sideways, never coming close to even the highest yields from 3/4....
As you can see, MBS appeared to almost be playing the same sort of ball they were for the past two days, but treasuries will certainly be opening their locker to find a one way ticket back to the Farm League. OK, so it's not quite so bleak... Spreads between the two ebb and flow regularly (unless you look at 2009 through present in which they've more or less tightened in a perfectly straight and viciously sloped line of Fed-induced awesomeness), and certainly when/if the Fed bows out, the extent to which spreads will widen back out is a hotly debated but almost universally agreed upon topic.
But for 2009, and for now, WE'LL TAKE IT! FN/FR want to buy out 120+ day delinquencies causing reinvestment into 4.5's? We'll take it! Barney wants to reiterate his support for some sort of explicit government guarantee (a la Ginnie Mae's), we'll take it! Spread products in general want to look like a bit of yield preservation when things are selling off, we'll take it! All these things (and more?) added up to greatly soften today's blow in the big picture. Look at it this way... MBS made it right back to Wednesday's range, whereas tsy's are still 4-5bps off their Wed. levels.
Sadly, whether it's due to the impending Fed exit or due to technicals in the following chart(s), it won't last. If treasuries end up being stronger than expected in the following month, MBS will widen. And if treasuries are selling off, MBS will be in tow. Unless one of two things happen--something changes about Fed exit or catastrophic bear event for recovery--it's a lose/lose situation. That doesn't mean anyone knows exactly how it will take shape, but few disagree that it will...
Bottom line, enjoy the 101+ days for the 4.5 coupon. Enjoy the bounces of the long term trend at 100-28 as MBS fights back to the next higher handle as treasuries languish and die post-NFP. Enjoy seeing the number FOUR anywhere in the "rate" field of your LOS. It's not that it's going away on Monday or going away forever. Please don't hear that because there is a chance we could be right back in the throws of a JV version of 2008 by late 2010. But do hear this: whereas it was fairly easy heading into late 2008 to have confidence in the progress of the basis and bond prices in general, that collective confidence now suggests regression of the basis (MBS vs. Tsy's) and of bond prices in general. So 2009 was "double your fun" and 2010, well, not so much.
Just keep that in mind when it's a Wednesday or Thursday afternoon and MBS are at their highest levels in a few months and you're considering chasing the extra quarter to three eighths for what might cost you a deal and a client. No no no... The "float boat" has not gone "all soft" on you... No worries there... Captain MG is a man of the sea. But we have more port time ahead and calmer heads will prevail. Speaking of port time, this chart seems like a lighthouse in the fog, calling us to safe harbor for a bit.
Yeah, that was not one, but two precise bounces of annual highs, with the 2nd coming on the heels of an "unsustainable-looking" spiky little rally. Sure, we lost 5 ticks today, but in your eye, how much worse might that get unless figurative bombs are dropped on the financial markets next week?
If you're being good boys and girls and playing the range until the range plays you, you either locked on Wednesday or are looking at the classic "sell on the downswing" lock signal. Whether you see it today or will wait for confirmation next week is up to you. I think though, longer term, PAR on the low side, and 101-16 on the upside, look like fantastic pinball bumpers for the range. Plan on the bump until the bumpers dissolve.
That's it for for the talky talky, but I have a few more charts for your collection of weekend reading.
Long Term Treasuries
Two well-supported competing trends in treasury yields. Draw your own conclusions. Choose your own adventure... If treasuries continue to rise, turn to pg. 48 to lock a majority of your pipe, if treasuries fall through the lower line, turn to page 93 to fade to pray they either fall far enough or MBS have some cause to stay tight enough for rates to improve.
Long Term Stocks
Love: stocks go no higher than previous highs.
Hate: Equities Starship returns for reunion tour and blasts off to heights unknown...
It's a thin line...
and yes... I agree that stock charts with captions tailored to MBS bulls can get no better than that. Don't try to fool me with those thousands of emails that just say <GROANS....> like you usually do! I won't fall for it this time! I'm going out on that high note! Have a good weekend...