Widespread Reprices for the Better Reported. Still Battling Resistance Levels

By: Matthew Graham •
  • Fannie 4.5's up 10 ticks to 100-14, Near Highs Of The Day
  • 10yr yields down 3bps to 3.85, also near best levels of day.
  • Stocks Down Moderately Across The Board
  • Fed Speak From James Bullard at 4pm Eastern
  • Clock ticking down rapidly to most epic display of "holding ground" in recent memory

A couple important things:

IMPORTANT THING 1:

We often discuss the difference between the 3pm "marking" and the 5pm "close."  As you may know, there are important difference between these two  times, and they are both justified in being thought of as "the close." 

It's no coincidence that a lot of the street level commentary referencing "the close" comes out shortly after 3pm, even though bonds continue to trade until 5pm (MBS go to 5pm every day whereas treasuries are 24 hours a day all week, until 5pm on Friday).  There are several reasons for this, not the least of which is the fact that volume, participation, and liquidity tend to die down significantly in those last two hours. 

It's a bit of a chicken/egg phenomenon as the 3pm marking convention may have arisen due to the illiquidity (since the more liquid trading up until then would be seen as a better representation of accurate bond prices), or the illiquidity may be arising due to it being known that 3pm is the unofficial close.  But these "why's" don't much matter as long as we understand that if volume is indeed on the wane from 3pm to 5pm, prices run the risk of being distorted at worst and not exactly representative of the real market at best.

Fridays magnify this dynamic as participation is under even more pressure as actual PEOPLE who constitute important parts of the market's movements have literally "left the building."  The point of revisiting this often glossed-over concept is to say that for the purposes of assessing trends, 3pm matters unless something causes the 2 hours that follow to be unusually busy.

In that sense, we only have an hour and a half left to assess whether or not the closing levels tell us one thing--that the range holds--or another--that the range is broken

IMPORTANT THING TWO:

All week, and even before, we've called attention to the 3.85 yield in 10yr treasuries as the high-side boundary of the recent range in treasury yields.  Furthermore, we've placed extra emphasis on treasuries this week as MBS are, in no way, driving movements in the rates market.  MBS are REACTING to movements elsewhere in the market as opposed to INSPIRING other parts of the market to move. 

I repeat: nothing about the fed exit is responsible for the overall weakness in MBS this week.  To suggest that there was actually causality there would be to label the concomitantly awful performance in treasuries as something merely serendipitous.  Make no mistake, the awfulness in treasuries was the result of several non-MBS related causes, and MBS prices merely adjusted to keep pace with the curve.  Follow the leader and all that...

With that said, we're back to confronting the extra importance of 3.85.  Yields rose past this level earlier in the week and closed higher (3.88) yesterday.  But breaks of the range are not totally CONFIRMED (accepted as an indication of a shift in the range) until they have both broken the range definitively, held that breakout for a subjective amount of time, and done so with healthy to high volume.

Granted, many of those components are there, and for some, a break of 3.85 is already an accepted conclusion.  But if today's rally leaves us within a bp of that level or lower, others will view this as a FAILED TEST of that range boundary (test fail: when prices or yields break through a technical level and have the potential to confirm that breakout with additional movement, time, or volume).  

If you ascribe to the latter subjective viewpoint which would consider a return to 3.85 or below by today's close a failed range break-out, it would constitute one of the most epic displays of "holding ground" in some time.  In other words, earlier in the week, it indeed looked as if the imaginary wall at 3.85 was breached and the evil troops of deteriorating rates were poised to storm the castle.  But a 3.85 or lower yield at 3pm would at least be a glimmer of hope that the castle can be saved and a potential outright victory at best.

  It could go either way at the moment as we've been well into the 3.85's on several occasions today.

Whatever the case, the strength in treasuries and consequently MBS today has led to widespread reprices for the better.  But if we get a 3pm mark around 3.85, it could lead to additional resilience in the month-end week beginning monday.