MBS and Treasuries Close At Worst Levels. Rest Of Week Uncertain

By: Matthew Graham •
  • FN 4.5's close down 10 ticks at 99-31. Yield at 4.51.
  • Secondary Market CC=4.509. Yield spreads wider.
  • 10yr Tsy down 11 ticks.  Yield at 3.865
  • S&P broke 1200. Up to 1210.65
  • Mixed technical signals echo fundamental uncertainty

Lots of charts tonight, so we'll dive right in.  Bottom line, long term charts in MBS don't look too hot:

The "not too hot" in this case is derived primarily from being below all the major long term support from February and March (though we'd catch a break looking as far back as early Jan).  Still, the difficulties for bonds are palpable.  Treasuries aren't too much better, though in the short term, there's room to move either way.

Shifting from "plain old" treasuries to the futures market, we find ourselves on much more of a fence.  A dip below that support level wouldn't necessarily be the end of the world, but neither would it be bullish.  Some solace could be taken, however, that there's another great candidate for support on the following chart, just below the existing red line at around 116-00 even.  The moral of this story is that there's still fight in the dog despite us being down to our last dog in the fight.

None of this would be quite so disheartening if it weren't for the freight train.  Stocks continue to trend upward steadily and with perhaps more surety than a bevy of suns rising in the east.  Does that mean they'll never stop?  I don't know.  I do know that today was a pretty decent stock rally, AND on higher than average volume, and on econ data that wasn't especially stellar (retail sales beat estimates, sure, but what else?  Oh well... Stocks must have liked it).

But the stock rally in and of itself, should not a bond sell-off make.  The tame CPI, and ongoing commitment to "extended period" of low rates as indicated (not surprisingly) by Ben today are both good things for bonds.  Unfortunately for MBS, whatever "good things" were happening seemed to be felt primarily by the shorter duration bits of the yield curve.  3 charts up, you can see the yield curve tick back up over 280bps. 

It's still possible that the long end might see an opportunity to ratchet things back down for another test of 3.82.  There's room for that both in terms of outright yield, and 2s10s spread, but if today is an indication, it seems like it might require stocks to play ball (i.e. not rally into multi year highs again).  Actually, the challenge looks more like 3.84 at this point.  You can see on the chart below that it's been tough to get through recently, and once it was broken, yields dropped abruptly. 

Conversely, once yields move back up over 3.84, it was a signal for this afternoon's aggressive late day back-up (though it should be noted this occurred on low volume).  This makes the breakout of the triangle (where the yellow line crosses the diagonal red line) a bit less conclusive and throws another chip in the pile of "fence-sitting."  Whatever the case, whatever the volume, staying under 3.88 seems important from a technical standpoint.

And then there's our beloved MBS...  Along for the ride...  There's plenty of support around 99-29...just a few ticks shy of today's close.  And we're welcome to derive a measure of reassurance from the yellow uptrend being intact.  Both these lines offer some support to potentially falling prices tomorrow, but remember that such lines are even more valuable in alerting us to shifts in trends. 

In other words, don't EXPECT them to provide a "bounce" to prices, but merely observe them.  If we get a bounce, the trend is strengthened, and if we don't, those losses have some extra significance because of the levels they're moving through.  On the upside, a 5 tick rally isn't a barn-burner of a day, but 100-05+ was quite the tough cookie earlier in the month, and even supported falling prices in recent sessions.  We'd expect it to continue to be significant.

Looking for a "translation" on all of that?

I guess it would be that today's weakness isn't necessarily a sign of things to come, but there's plenty of potential for gains and losses ahead, either way:  ENERGY IS BEING STORED FOR THE NEXT MOVE

As far as tomorrow is concerned, 3.88 seems like the biggest deal as far as "bastions of defense" that we'd NOT want to get overrun by losses in the 10yr, and 99-27 to 99-29 in MBS 4.5's might be a similarly gut-wrenching prospect, though the real drama as far as MBS losses should be reserved for 99-20 to 99-22.