Bonds Go From One Extreme To Another In One Day

By: Matthew Graham •
  • 4.5 MBS down 7 ticks on the day at 100-14
  • Secondary Market Current Coupon: +3.8bps to 4.443%
  • 10yr Treasury Yield gives back most of yesterday's gains, now at 3.767%
  • S&P up 0.65% to 1191, but right in the middle of yesterday's post-Greece downgrade range

Shame on me for ever having said anything about the 5yr auction yesterday.  Granted, it could be that the auction was, in fact, traded upon, but we wouldn't know it by looking at yield fluctuations or the volume that came with them (or didn't come as the case may be).  There are a few gorillas in the room.  Big Greek gorillas, as well as the OG (original Gorilla?) Bernanke and co with FOMC announcement that trailed the auction by just over an hour.

Allow me to simplify... 

Let x = status quo

Let g = Greece downgrade

Let s = Spain downgrade

let a = 5 yr auction

let f = FOMC announcement

g + s + a + f = x

Sure, it's probably far too soon after a very volatile two days to assume a perfect return to the status quo, but then again...  Have MBS violated some major support like 100-10 or 100-05?  Have 10yr yields even left their trading range?  

Wow... If you didn't know about the drama, things kinda look like "more of the same."

How about stocks?

Ok!  Now we're on to something!  Or are we?  At first it looks like stocks are a good 20 S&P points lower than pre-Greece levels.  And that would put stocks at odds with MBS and Treasuries return to previous ranges.  BUT if we give this chart the same periodicity as the previous charts, check it out:

And of course by "1200 ft home run" I mean " a sustained break over the 1200 pt level."

Anyway folks...  It is indeed a wild wild world. 

Tomorrow we get the usual Jobless claims, and a 7yr auction that should serve as some sort of indication as to how much volume the 5yr auction might have seen were it not followed by the Fed.  Then Friday brings GDP, Consumer Sentiment, Employment Cost Index, AND Chicago PMI.

If you believe in the continuation of the existing trends/ranges, you understand we might be dealing with a probe to slightly higher yields, but continue to favor the float until the trend is meaningfully broken.  If you'd rather avoid the volatility or are skeptical about a return to that 3.80 to 3.84 range in 10yr yields, you might be a bit more locky.  Either way, volatility is picking up and probably has it's best chance to subside with NFP next week.  Until that has a chance to offer some clarity, we're definitely still looking at a market that could go either way.