Rate Sheet Influential Coupons Consolidate And Confirm Range

By: Matthew Graham •
  • FN 4.5's at 101-11, down 5 ticks on the day, (right around 101-00 on the soon to be front-month June Coupons)
  • 10yr Yields +1.1bps at 3.416
  • Secondary Market Current Coupon: +0.8bps at 4.288%. Yield Wider then Tighter Now About Unchanged
  • Stocks are down more than 1.00% (S&P down 1.5% at 1111)
  • When previous assumptions and even logic break down, technicals take the spotlight

Starting with a LONG term MBS and Treasury chart followed by discussion:

Here's a secret: the chart above shows the general trend taken by MBS ever since reaching the highs after the Fed's announcement of the buying schedule in late 2008.  What makes it even better is that the only trading that falls outside the trend are the "sell in may and go away" summer doldrums that don't much matter to the broader market compared to the other 9 months of the year.  If you want to get psychological, you might think of these lines as showing the "slope" of recovery-induced and painstakingly gradual increases in rates.

Guess what else...  We won't spend much time over the top line...  We could REVISIT it for a probationary period like November 09, but coming up on Monday/Tuesday is MBS Class A settlement which shifts our focus to June coupons as the most current, effectively sapping 12-14 ticks off the charts.  If that happened today, we'd be right on the top line.  Go figure...

If MBS has this "slope of recovery," how bout treasuries?  You betcha...

(stay with me here...  there are a lot of lines on this chart--necessary ones.  We'll walk through them step by step)

The "slope of recovery" here would be the series of red lines--a volatile, but gradually higher rate environment as catastrophic global economic panic subsides.  The teal lines show the DOWNTREND in yields that prevailed after unwinding the "panic bid" in late 08 into 09.  Notice the INSANE amount of significance the chart suggests for our lowest RED line around this time! 

We see a clear break of the teal line in December, indicating a possible END of that nice downtrend.  In Jan and Feb, yields tried to break through again and failed.  The downtrend was over, and the trend shifted back into an UPTREND, either by rejoining the previous RED trend, or by worsening a bit more quickly with the more aggressively bad green trend.  When the "green" trend broke (around 3.72), the next test was the red trend as we moved quickly to 3.62.  When that broke, all hell broke loose and there wasn't much long term resistance for anything but a move to 3.38 which has been our clear "bottoming out point," save for a 1 hour probe down to 3.32 this AM. 

VERY INTERESTINGLY, it is that lowest red line that provided INTRADAY resistance yesterday, as if to suggest "yeah, we can go on a mind-bending rally, but long term, we're still heading up in yield."  There's so much in play here, and so much at stake, but once you get past the mess of colors and lines, this chart makes it simple.  Will we get back in to the teal channel?  It's possible, but would require some ugly things to happen in stocks and beyond.  The key is to revisit these periodically to see what daily and weekly levels are saying about adherence or departure to the longest term and most reliable trends.  Forest for the trees...

Shorter term now:

We'll discuss MBS right here and Treasuries below the chart.  So...  In the MBS portion, we can see a clear base of support starting tuesday with the red line (uptrend).  This might be short lived given next week's settlement, but one or both of the yellow lines might come into play.  The upper yellow line is that same "gradual downtrend" seen in the top line of today's very first chart.  The lower yellow line is just a horizontal level I had on that same chart.  Should be a few ticks higher actually, but I'm sure we'll take a look at that longer term chart in days to come.

This treasury portion of the chart is a bit funky.  The initial downtrend in yields this week can be seen with high limits along the dotted teal line and low limits on the solid teal line for about 2 days.  Then things really accelerated (acceleration seen in more heavily sloped red line), and we got some counter-currents (white and lower dotted teal) that worked with the downtrend to pidgeon-hole yields right where the lower limits of the weekly downtrend (solid teal line) was originally pointing.  Pretty nifty...

Finally, stocks... Just because.  Someone said 1110 might come into play as support today for stocks.  Although it did get tested significantly, it does seem to be the mode (as in mean, median, mode) as far as lows went today and yesterday.

What does it all mean?  Not a clue, as always...  But we'd watch the long term trends in 10's above all else, and have a little default assumption about MBS facing some liquidity hurdles and price challenges in this newly volatile environment.  Remember that the long term uptrend is still an uptrend in treasuries unless it's broken (and significantly at that!).  Stocks will be important in coming days as well.  Some are hoping for or calling more pain ahead.  That could help us, but MBS, in this rare case, only have so much higher they will go before the prices are just too high, regardless of what stocks and treasuries are doing.  With the fed gone, and the gradual two-step of recovery, MBS actually have some technical significant as far as the top trendline is concerned.  Just like I began to entertain 6 months ago, that line, or that SLOPE or that PACE, still seems like the best candidate to represent where things are generally headed.