MBS CLOSE: What Can Today Tell Us About Tomorrow?

By: Matthew Graham •

This is always the question right?  I mean, after all, we already know what is available on our rate sheets at the moment, but the most valuable question always asks for tomorrow's MBS prices today.  Forgetting for a moment that you'll usually LOSE more money thinking that way than you'll make, let's suspend GUTFLOP and see if we have any hints at tomorrow's action according to today's events.

First, the fundamental arguments...  What do we know?

  • 10yr auction built up a decent concession going in and stopped pretty much on the screws (meaning that rates went up ahead of the auction, then we saw strong demand at those rates)
  • Strong demand AT THOSE RATES is evidenced by the relatively high "offers accepted at high" metric from the auction, meaning that most of the buyers at auction had bids at 3.735%
    • Keep in mind, this does not mean there was strong demand for 10yr notes at the rates we saw this AM. 
    • The concession had to ramp up (meaning rates had to get higher) right up to the auction in order for this strong demand to fall in line with trading. 
    • The "ramp up" is evidenced in the concomitant accumulation of volume into the weakness
    • The volume spikes present a risk of any potential rally in bonds encountering "one man's ceiling = another man's floor" resistance.
  • Though much more robust than the first 3 days of the week, tomorrow morning's data is still relatively light, suggesting continued focus on the auction process. 
  • The overall message from the 10yr is that 30's will also likely have a good demand, but only if the concession can bump rates a bit ahead of the auction.

Those fundamentals, line up well with an important technical observation.  The chart below will reiterate that there is still room to move higher in yield within the confines of recent ranges (and even directional trendlines).  If AM data doesn't stir the pot much, it would not be a surprise to see weaker bonds heading into the auction but stronger coming out.  The actual strength is a bit more of a mystery, but given current levels, we may be able to get in the green tomorrow even before retail sales on Friday.  Then we're in a situation where a neutral or weak reading on retail sales allows momentum from tomorrow afternoon to carry over into Friday.  Long story short, even if yields move to test this upper red line tomorrow, there's a good chance they'll retest the lower line shortly thereafter.

 

Here's the obligatory MBS chart as well, but with spreads as tight as they are, what affects bonds will affect us as well.