Greek Downgrade Moves Markets. MBS Along For The Ride

By: Matthew Graham •
  • MBS up 16 ticks to 100-21
  • 10yr Note down 11.6 bps to 3.692
  • MBS Current Coupon -7.9bps to 4.405%.Yield spreads wider
  • Stocks tanked. S&P shed 2.34%. Dow down 1.90%. NASDAQ - 2.04%
  • FOMC and 5yr auction tomorrow

Should you find yourself in any sort of debate as to whether or not Greece was the the major mover today, use the following charts as you see fit:

117-06 has been a stark division between higher prices and lower prices in treasury futures.  Until the Greece news hit we were still unable to get through 117-06.

And for emphasis, on this shorter term chart, the 11:30(ish) news is easily seen...

As usual, MBS gains couldn't keep up with Treasury gains into a healthy rally, but green is green.  And green is good.  In fact, MBS finally got over 100-16 in some sort of meaningful way.  But treasuries merely returned to the more bullish limit of their previous trend.

Looking at a bit longer time frame, we can see the justification for 100-16 as important and also a hint that 100-22 may provide resistance and support if meaningfully broken.  In the treasury section of the chart we see some indecision.  The long term trend of "higher lows" broke today and will be under scrutiny in coming days for "confirmation" of that break.  The fact that yields didn't move lower still into the previous downtrend suggest (to me anyway) the seemingly exuberant rally was perhaps more calculated than we might imagine--at least in deciding how far to go.

As you might expect, stocks tanked...  No surprises, but they did tank uncharacteristically badly.  Take a look:

It's hard to know how all this will play out in coming days, but I do think it's significant that we saw the highest volume in over a month a day BEFORE an FOMC announcement and a 5yr note auction.  There's not much justification to  lock any deals that you weren't already needing to lock unless you saw huge improvements this afternoon.  For 1-3 eighths, I'd probably be to interested to see how things play out going in to month end.  Given that the 5yr auction and FOMC occur in the afternoon, you stand a good chance of being able to see changes for the worse coming.  But keep one very important thing in mind: tape-bombs upset the game-planning!  In other words, things had been a bit on the bearish side until today's tape bomb, or at least it looked challenging for MBS to get over 100-16 and for 10yr futures to get over 117-06.  But the tape bombs are game changers.  And just as we had one that was of benefit today, we can always have one that takes us the other direction tomorrow.