Bond Market Fails to Hold NFP Rally. Lack of Liquidity Contributes to Weakness
I'm here to offer some perspective amidst what might seem like crisis. The crisis? Weak NFP numbers sparked massive bond rally that unwound into the close (worse in treasuries than mortgages). So is that it? Bond markets have ostensibly failed to fight back at the gates of a 3% 10yr note? Does that mean we're toast? Never to see recent mortgage rates again?
Look... Sell-offs are always discouraging when you have our kind of skin in the game. I spent a long time originating full time and writing about markets part time (other way around now), and it never ceased to amaze me how much of my own mood was tied directly to MBS movements. I wish someone had popped a tranquilizer dart in my neck (wouldn't have slept, but might have calmed me down) and said something similar to what I say to you now.
BONDS CAN DO WHAT THEY DID TODAY WITHOUT IT HAVING AN IMPLICATION ON NEXT WEEK'S TRADE.
This kind of day happens, has happened, and will happen, and whether or not you can believe me now, it really doesn't mean what it looks like it means. There are almost too many mitigating factors to list that cast shades of grey on today's sell off, but I'll list a few:
- getting close to year end, flows are light and finicky.
- money flow was negative today profits were being taken, shorts were being covered
- It's also a Friday
- The sell off, or bulk of it, also occurred in the afternoon hours of that Friday when folks were gone and liquidity was lacking.
- The indicative volume came in the morning when bonds were rallying
- 3.03 is a valid support level we've been talking about for 2 weeks. There's a reason for that
- we've not crested the worst yield levels from the past 2 days.
- MBS have outperformed treasuries and have not been subject to the same magnitude of losses.
- yields have risen so much since the last time 3's, 10's, and 30's were auctioned that many anticipate strong auctions next week
Bottom line, we're not freaking out about "an end of an era" and neither should you. Prepare for next week as best you can in terms of having unlocked parts of pipelines ready to lock. Worst case scenario, it's simply AS bad as it might look to some of you now. Get some R&R this weekend! You might have to force yourself to detach from the markets and their impact on your paycheck and ability to deliver on client expectations. This requires a conscious effort sometimes. I could probably write a couple pages of things to remember or strategies to employ for maintaining sanity as an originator who follows MBS (a couple more anyway), but that will have to wait. For now, here's a pictorial recap of the day and a few charts with things to keep in mind in terms of perspective.
Yeah, if you're keeping track, 4.0 MBS actually closed in the green by 4ticks today.... Treasuries on the other hand, not so much...
But what's this? MG has pasted in futures volume underneath cash market yields. A bit unorthodox, but it shows most of the volume was in the morning, driving yields down, and then another decent chunk to take profits. The remainder just kind of leaked out toward the end of the day and the week. Here's a slightly longer term look at treasury futures and volume
The volume this afternoon really hasn't been that abysmally low, but compared to the volume driving prices UP this morning, it's almost insignificant. What would it look like if we weighted that price curve according to the amount of volume that came in at any given price? Probably a lot like this:
Finally, here are some LONG term charts in MBS and treasuries, just because I like to look at long term charts when things try to get disheartening.
Oh yeah! I guess we're still doing pretty good considering even MG thought we were unlikely to break that upper red line after the late 2009 bounce. Hmmm... Guess we're still above it.
Conclusion: Meh.... Treasuries still kinda look like they're on a fence to me. last time they rose up out of the 2's, they took several months of bouncing around 3% to make it through definitively (and closed over 3.0 more than a few times). I mean, we won't have a 10yr note under 3% forever, but neither are we likely to see it move definitively into the 3's and stay there. And without the fundamental backing behind the sell-off today, nothing has been proven as a source of the broader market's optimistic attitude. This has been a trader's world for the last two years, and it will continue to be a trader's world until there is much less uncertainty in the models of forecasters.