Bond Market Gets Weaker After Auction. Multiple Reprices Reported
The weak 3yr note auction at 1pm did little to assist an already bearish bias in the bond market. It's not that the 3yr auction was alarming in and of itself, but in the context of recent auctions, today's needed to be way way stronger if it was going to help overcome the negative price pressures that were already in play, having been inspired by tax cut extension/unemployment benefits news among other things. Further, we really need to see that way way stronger performance tomorrow and Thursday for the bond market to make a meaningful reversal.
Liquidative MBS selling brings 4.0's from 101-09 last night down to 100-01 at present, a loss of over a point! Choppy/gappy/rapid moves like this are exactly why we've been advocating a defensive stance until further notice. Extension risk is high and MBS prices are much more sensitive to changes in benchmark yields.
In the grander scheme of things, MBS don't look quite so bad as even after today's losses are considered, we're only now moving to test the previous boundaries tracing back to early 2009. In this sense, current losses are more about a return to a previous trend than some sort of premature elimination of an otherwise long-lived rally. In other words, any amount of time that MBS have been able to trade above the red line below constitutes "borrowed time." That's not to say that we won't necessarily get to spend more time above the line. It's just that the comfort with which we've been safely in that high range has vanished, giving way to uncertainty.
By way of benchmarking the slaughter, we find 10yr yields pushing 3.14 at the moment versus last night's closing levels around 2.95. In addition, as accounts shift year end preferences to shorter durations, the yield curve has ballooned to 255bps again, pretty much the steepest seen since summer months.
Speaking of summer months, those were the last in which treasury yields were any higher than they are now. They align to form what is perhaps the most significant internal trendline in the financial world--or at least in a MBS devotee's world. From the first point of resistance as yields fell in 2008, this line went on to cap sell off attempts in Q109 at just over 3%, it then provided a strong resistance bounce in Q2 as yields attempted to reenter the promised land. DENIED! Again in Q4 yields met resistance as they neared the line and finally skidded numerous times into resistance in Q210 before breaking through, retesting the support, getting a firm bounce, and moving lower. We've been lower ever since, and it is thus that we find ourselves looking toward this long term internal line for the last vestiges of "low yield days" support heading into year end. As you can see in the chart below, when yields cross this line, they don't cross back over any time soon.
Stocks meanwhile, found overnight events sufficient cause to break their early november highs, and despite some losses since then, bounced off support implied by those previous highs. Hello Pivot point... Goodbye potential support from the stock lever.
Nonetheless, we remain proponents of the "volatility" thesis of the current economic environment. If stocks can rise, stocks can fall (or they can rise some more!). The intermediate outlook for rates is bearish in general, but we await whatever sort of tests may occur of the trendline in treasuries. By the way, that could have us seeing a 10yr yield between 3.17 and 3.22. Any higher than that (assuming it occurs with volume) and we pack it into the turtle shell for a long winter.
Reprices for the worse have been reported. 4.75% is now best execution for very well-qualified borrowers.