Flat Afternoon For MBS While Treasuries Improve Slightly

By: Matthew Graham •
  • MBS Close down 2 ticks at 100-10
  • 10yr yield improved slightly on the day to 3.86 (or did it?)
  • Adjusting for volume, you'll soon see treasuries are pretty flat as well
  • Stocks battle 1174 again, and lose (again)
  • more yield curve (do you care?)

Devoid of meaningful data, the afternoon was free to trade away, quite sideways after bonds picked themselves up off the 1030am floor.  To observe said floor,check out the lowest dip on the right side of the chart below.  (and then to observe "quite sideways," observe the 3 tick range between 100-07 and 100-10 that prevailed)

On March 25th, 100-07 was looking quite "ceiling-ish."  And now, quite "floorish."  This doesn't mean squat as far as holding firm overnight, but simply that we should watch for support or resistance the next time prices approach this level.  Same goes for the other levels mentioned.  100-16 is the high end we've been unable to break for 3 sessions.  and 100-03 is sort of the last line of defense before rolling over and accepting a 99 handle (a 4.5 MBS price that begins with "99" instead of "100.")

Treasuries were a bit better into the afternoon, and even look to have broken to the downside of a trend channel (red lines).

It turns out the teal line can tell us quite a lot.  Remember that the teal line above is 3.82, and then check out the following chart: Volume-Weighted-Average-Price on 10yr futures contracts.

OK, so teal line...  In the chart above, the teal line smooths out the choppy price action by factoring in volume.  The higher the volume at a given price, the less subsequent changes at lesser volumes can move the line.  See where it goes "all flat" from 10 to 11am?  That's Chicago time, mind you, so 12 - 1pm eastern...  Then you see the three red circles, and how there are 2 major turning points near that same level?  (I threw the middle red circle in so you could see where the sell-off first paused).  Anyway, this chart is in decimal, so that VWAP being around 115.82 is something like 115-26 and change.  And if we plug in conversion factors, that's the same teal line from the treasury yield chart around 3.82.  Yeah, so volume says don't read too much into late day strength today.

As far as the yield curve is concerned, yields between 10yr notes and 2yr notes narrowed today (flatter curve), but here again, volume has a story to tell. 

Notice the initial volume spike (white circle), followed by the narrow range throughout the rest of the 25th and 26th.  AND WHAT HAPPENED THE ONE TIME THE CURVE DIPPED BELOW THAT RANGE?!  Highest volumes of the day (first thing in the AM) brought things right back into it.  So with 2's on the rise today, we might wonder if the curve is willing to go much flatter.  NFP could shift things for sure, but until then?  Well, the greater deviation between forecast and reality in tomorrow and Thursday's econ data, anything's possible, but all things being equal, the yield curve looks like 2.8 or higher is where it wants to be.

For stocks, it's the same old same old.  More struggles to close above 1174.  There are decent efforts during the day, but the flat parts of that chart, which represent the closing levels, will show they have yet to crack this nut in recent sessions.

Looking at S&P futures (overlaid against volume bars), we can see the market certainly wants to be somewhere around here, but in "honing in" on something, it certainly also doesn't seem to want to go much higher until NFP (or whatever else that might step up to the plate with an "NFP-like" market moving effort)

What does all this nonsense tonight mean?  Not a damn clue...  But if I had to guess, I'd say the following:

  • Don't expect any levity in bonds barring unforeseen and exceedingly bearish economic data or headline news
  • All markets appear sideways/coiling into the NFP report (pretty standard really)
  • the big and more significant moves outside these ranges will most likely be elicited by NFP

So major lock decisions deal more with Friday than anything.  From there, anything you know you're going to lock before NFP, the closer MBS are to 100-16, the more locky I'd feel.  But I might also be a bit worried that MBS could just go sideways then down, and never come up this high again due to my uncertainty over how the fed exit will play out!  How serious is that last sentence?  I'll tell ya on Friday!