Bond Market Sending Conflicting Signals As S&P Clears Resistance

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  • FN4.5: -0-06 at 102-12 (102.375)
  • Secondary Market Current Coupon: +5.1 bps at 4.103%
  • CC Yield Spreads:+79.5bps/10yTSY. +72.3bps/10yIRS. Wider vs. Monday 5pm marks
  • UST10YR: +4.4bps at 3.306%. 2s performed "least worst",  +0.02 bps at 0.758%
  • S&P CLOSE: +2.35% at 1115.23.  HIGH: 1115.45 LOW: 1089.62 BEST SECTOR: Industrials +3.01%

The big news of the day: S&Ps finally broke the 200 day moving average!

Interest rates held their ground against the stock lever for most of the morning before finally giving way to the "big news of the day".  The 10yr let it sails out and starting luffing in the wind around 11:45am EDT, but didn't cross through 3.31% support.

While price action has been whippy and yields are trending higher, no new sell signals have been offered by the bond market. This has been a consistent theme lately. Although stocks have ticked higher in 3 of the last 4 sessions, the 10yr note has managed to stick to a range.  It's almost like the bond market is trying to tell us something...

Like benchmarks, "rate sheet influential" MBS held their ground for the first half of the session.  Things got ugly after that though...prices fell, spreads widened, and lenders repriced for the worse. That's three strikes....

Doesn't it feel like the stock market is operating in its own little world again? Doesn't it seem like the bond market is trying to tell us it has no faith in the stock market rally?

I am still getting very mixed messages from this market.

Fundamentally, bearish headlines have been ignored and poor economic data (HOUSING!!!) has been met with counterintuitive reactions ("fades"). The EU crisis has made no real positive progress (only time will heal), oil is pooooouring into the Gulf of Mexico, the U.S. housing market is experiencing a horrible tax credit hangover, and the reality of a LONG SLOW ECONOMIC recovery is setting in around the world.

Yet...nothing stopped the S&P from testing and breaking the 200 day moving average.

Technically, it's been a slow slog higher, but stocks have finally crossed through that milestone and appear to be building "momentum". The only problem is there isn't much participation in the rally and open interest has been on the steady decline over the past few weeks. This implies the ongoing equity market uptrend has been a function of SHORT COVERING ahead of options expiry on Friday. It's the pain trade unfolding right before our eyes.

The problem for rate watchers is: the stock short squeeze could evolve into a quarter-end window dressing rally and while nervous retail investors are not going to sell their flight to safety positions (in the short end of the yield curve) just to jump back into the risk game. On the other hand, professional investors who've parked cash in the long end of the curve (yield grab) are likely to exit those positions and "rate sheet influential" MBS prices would suffer because of it. This would be an unfriendly originator event.

Plain and Simple: the recent stock market rally has yet to grow legs of its own as forced buying has led the index higher. This leaves equities susceptible to a HUGE sell off. However, if new money makes it way into risk markets after expiry on Friday, the glass rally could evolve into something with a little more size heading into quarter end. If stocks do extend the recent rally, it would surely push the FN 4.5 back into the 101 price handle and loan pricing would suffer as a result.

There can be no rainbow without a cloud and a storm...