Flight To Quality Leads Rates Lower. Reprices Reported

By: Matthew Graham •
  • FN 4.5's are up 12 ticks to 101-30, near the highs of the day.
  • 10yr yields are 8.9 bps lower, and the curve is seeing lots of flattening 
  • Euro at weakest levels of day. High was 1.2444, Currently at 1.2251 and still falling
  • Stocks Lower as Euro Weakens. S&P down 1.25% at 1122. Dow is off 0.85% at 10533
  • No more data today, Tomorrow Brings FOMC.

After a strong open, the value of the Euro fell which pulled stocks lower and forced another flight to quality into risk-free Treasuries. This helped rate sheet influential MBS rally and allowed a few lenders to reprice for the better.  The chart below illustrates the effect of shifts in the currency market on the value stocks.

"V" may be for vendetta, but it's also the shape of MBS prices so far this week.

Cautiously floating, and being ready to lock at a moment's notice continues to be a good way to go as the "extra little bit" of space between closing yields yesterday and their likely technical targets is being explored today.  Technical levels continue to work out so well due to phenomena like "forced buying" that AQ discussed this AM.  There's day trader selling too (profit taking), but the stock lever isn't permitting that bias to gain much momentum.

This all adds up to some very linear horizontal levels in both MBS and Treasuries that serve as excellent indicators of varying degrees by which trends might shift. 

Did that make sense?  In other words, it's like we're looking at different trip-wires with implications of different severity.  Cross 3.6 in the 10yr and the trap really lets you have it.  But merely cross 3.5 and the worst thing you can expect would be to fall onto a path leading directly to that 3.6 tripwire. 

Let's support some of these levels, especially 3.6 with longer term charts.

Stocks aren't really standing in the way today, although unlike treasuries, they are not testing the outer limits of their range from yesterday.  Relative to yesterday's trading, treasuries are the aggressor of the two.  This is further evidence that treasuries may be ready to move down and test the lower of the two trendlines from the chart above.

Stocks may be down on the day, but volume is quite low, AND it's NOT exactly that low in treasuries.  We can either take this to mean to stocks have more selling to do to get caught up with the volume in the market, or that the jury is still out until we get more data and more volume in the days to come.  On an optimistic note, the 2 day triangle AQ pointed out this AM is now broken by the recent rally that began just before 1pm, suggesting next test at 3.37-3.39 pivot level. 

If the cash market hits that, it still may not necessarily mean that futures are going to crest their epic mountain at 120-00 (twin peaks actually...)  Volume rises to take profits there.  Note the contrast in the low volume for stocks.

More "trip wires" in the futures chart above and more disbelieving utterances of "could this be the stock correction I've been waiting for?" 

Cautious floating is getting even better today as tomorrow's headliner doesn't hit until 2pm with FOMC minutes.  CPI is important, but compared to the relatively early AM average release time for today's significant data, tomorrow is looking good for more of the same strategy (for now anyway).