MBS Range Continues To Narrow As Prices Hover Near Unchanged

The bond market has been pretty flat this morning.

Prices of front month FNCL 4.0 are down 1 tick at 101-17+.  This follows an afternoon rally yesterday that brought them to nearly 101-24 this morning.  The move downward in price is part of a gradual narrowing trend that pervades multiple bond market sectors including the 10yr note and 10yr note futures. 

With no economic today, the market is left to digest the already-released text of the speech that Bernanke will make tonight.  With prices consistently neither higher nor lower than previous extremes this week, and with volume the lowest of any day so far, there is little to read into the market by way of predicting direction.

10yr notes continue to operate under the scarier extremes of the week as well

The most concerning development yesterday was quelled this morning when the 10 year futures price found support at the important 124-11 level after spending a few hours lower than that yesterday. We see the 124 strike as max support, breaking that with follow through would spell trouble for rate watchers down the road. This works out to about 3.00% in on the run 10-year Treasury note yields.

Just that small show of support for the range would seem to indicate something of a sideways day and at least for now, minimizes the risks of continued selling pressure this morning.  But it should be noted that ALL areas within the respective ranges in the charts above remain in fair play for the meanderings of prices on this dataless day, with breakouts of those ranges being cause for even more concern (or celebration).

Other bond market considerations: Bernanke reaffirms need for QEII: http://www.reuters.com/article/idUSTRE6AI2AQ20101119

Excerpts from the story...

Federal Reserve Chairman Ben Bernanke hit back on Friday at critics of the U.S. central bank's bond-buying program and issued a thinly veiled attack on China's policy of keeping its currency on a leash.

Bernanke, facing a chorus of protests about the asset-buying spree from within and outside the central bank, said a more vigorous U.S. economy was essential to fuel the global recovery and dismissed charges he was debasing the dollar.

"The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States," Bernanke said in a speech to a conference at the European Central Bank in Frankfurt.

This supports our theory that the pain trade (positional cleansing) is the primary motivation for higher interest rates lately. 

The bond market is closed next Thursday and investor attention will be generally distracted by holiday events throughout the week. Combine that illiquid environment with the fact that $35bn 2s, $35bn 5s, and $29bn 7s need to be digested by investors, plus bearish technical considerations (QEII cleansing process not complete) , and the resulting effect increases the potential for choppy price action. Thus, we not rule out the possibility for higher rates heading into December.  However, once the pain trade is washed out, we view the market as primed and ready for another attempt at an interest rate recovery rally.