Holiday-Shortened Week Kicked Off With Choppy Movements In Light Volume

Now there's a headline to keep on the shelf to be dusted off year after year....

In the absence of headline econ data, bonds performed well leading up to the first of two Fed QEII POMOs today. The AM rally came despite a strong start for stocks but after equities fell back in line with opening levels, the stock lever seemed to re-engage and an illiquid environment wasn't beneficial to the bond market.  We blame one headline for the afternoon reprices that were reported.

First, here's a look at how today stacks up versus Friday in both MBS and treasuries.  The notion of headlines having an impact on afternoon trading is apparent in the spikier move down in the chart below taking place just afte 2pm.

Stocks made an inverse, but similarly spikey move slightly before that in response to news that North Korea is reported to have expressed renewed interest in working with the International Atomic Energy Agency.

Just think: a potential step forward in terms of nuclear cooperation!  It's a stretch, but this is conceivably an event that soothes concerns about global nuclear proliferation and MAYBE contributes to a risk bid entering the market? Good for stocks, not as good for bonds. 

Here's a snap of stocks versus 10yr yields that shows that potential cat-and-mouse game as well as the generally connected nature of the stock lever beginning late this morning. Stock prices up = UST10YR TSY yields up.

But with volume that seems unlikely to even reach Friday's low levels, and on a data-less Monday kicking off a 4 day trading week in late December, illiquidity, sparse flows, and sub-standard participation are as valid a framework in which to view these spikey moves as anything.  Could be a simple factor of finally being forced to capitulate to stock gains, yet not willing to go back above the 62% retracement line seen in the chart below, as yeilds rethought their losing ways once they reached that 3.35-ish mark today.

As for the long term view of MBS, the following chart illustrates just how massive recent selling has been and may offer some perspective in that any further weakeness would threaten to dethrone the "Black Wednesday Era" as the steepest MBS sell-off in recent memory.

Friday's gains were enough to lead the best execution mortgage rate back down to 4.875, and with this morning's gains, we were seeing 4.75 gain some ground there.  But with afternoon losses, things seem to be right back at 4.875.  Granted, there's rebate at 4.75% but 4.875% still holds the best ex designation.  Again, 4.875 is a "flexibility" note rate that can be slotted either into a 4.5 or a 4.0 coupon.

Tomorrow does very little to improve the econ-data calendar with just the almost-negligible Store Sales report out early.  It's so negligible in fact, that we won't talk about it now, or tomorrow!  And while we see some generally more favorable tides in the process of turning for bonds, we know we're not the only ones who see those, and we're wary of any situation where our enemies know what we know and that we know it. In fact, the situation seems all too familiar... 

So just as I would be afraid of Ben Stiller in that movie, so too should we all be afraid of assuming anything about these early glimmers of positivity until it has done a a bit more to establish itself as a real turning point.  Nothing has changed in that regard... Turning points are still assessed one day at a time, but more cautiously given the circumstances.  Don't get me wrong... I'm hopeful, and of course, so is my cat... And rest assured, the rally sweater will come on if we slip below long term support.  Just don't be surprised if I point to really really low volume in days and weeks to come and say "it doesn't count as a break below support!  so I'm not putting on the sweater!"

PS....

We started letting War Roomers into MBSonMND last week. So far so good! If you signed up to be a beta tester, be patient with us, your invitation is coming. All is going well so far though. We are extremely excited to finally release this project!