Bonds Plenty Strong Today. Quiet Turns to Chaos Tomorrow

By: Matthew Graham •
  • 4.5's close up 8 ticks at 100-15 yielding 4.451%
  • Scattered Reprices for the Better Reported
  • 10yr tsy crept into the 3.74's
  • Secondary Market Current Coupon: 4.437%
  • Yield Spreads Wider. CC +69.4/10TSY and +70.9/10IRS
  • S&P -0.1% at 1205.94

Here are the MBS and Treasury charts.  Please note that 100-16 has been tough resistance 3 times already this month.  That doesn't mean that must be the case again, but something to consider if you're playing ranges until they play you. 

In terms of recent ranges, MBS haven't been much higher. 

And then in the treasury section of the chart above, not that today has been a decidedly lower low than the 16th, preserving some sense of a "downward trending yield."

That bullish downward yield trend doesn't match up too well with technicals in the futures market though.Take a look....

Now look from a WIDER PERSPECTIVE.

Possible double-top forming there....that is BEARISH for interest rate futures prices.

Seems to be a bid of a crossroads, but did we really hit this level on the 16th only to have the intervening days offering nothing by way of guidance, thus explaining away the price action that has taken place underneath that level? 

Not sure and we really don't want to look too much into this market's "feelings" at the moment. The empty economics calendar, constant babble about Goldman Sachs, a steady flow of earnings releases, low participation trading, political positioning, etc, etc, distraction, distraction, Greece....all really meant nothing to the market over the past 48 hours. There isn't much "newsness" to the market, no reason to really trade real bonds as much as bond contracts. But that all changes after today. The market will gets to wet its appetite in the morning.

The schedule is busy tomorrow. Besides producer level inflation data, we jobless claims that better stop rising and Existing Home Sales that must indicate the tax credit is breathing life into the housing market...on top of all that, the Treasury will announce 2s/5s/7s at 11AM. While we are waiting for the government's fundraiser needs to shrink, it is feasible that the Treasury will increase the size of next week's auctions. With that in mind. Be on the defensive for a reversal of today's positive progress.

THE WEEK AHEAD HAS DATA FORECASTS

The market is already working its auction supply concession angle on interest rate valuations. The 2yr TSY note yield fell 1.2bps today. The 10 yr note yield fell 5.4bps. The 2s/10s curve flattened 4.2 basis points to 274bps. The long end of the yield curve greatly outperformed the short end. The relative outperformance of the long end of the yield curve illustrates how trader's shunned soon to be auctioned 2yr notes. 

My point: a lack of conviction has been obvious in the bond market recently. No trade bias was apparent. But today, right before the Treasury announces auction supply, the yield curve flattens. The market is sensitive to auction supply.

The only thing that is confusing about price action is why 10s rallied so far, so fast. The quiet market is the first choice behind that....anything goes really. I suppose the moral of the story is: be defensive of gains in a quiet market, especially right before supply/demand is knocked out of equilibrium.