Perspective On Pre-FOMC Range

By: Matthew Graham • Wed, Jan 26 2011, 11:27 AM

We came into the morning with higher yields but were still trading somewhere near the middle of yesterday's range. Shortly before the New Home Sales report was released, we shared the following thoughts in the Updates on the MBSonMND Live Dashboard:

From 1/21, we've seen the range of yields and prices move steadily wider, connoting increasing volatility ahead of this week's event risk. This morning's levels are essentially in the middle of trend. This leaves them room to ramble higher or lower while remaining in the confines of the short term trend. Naturally, from a pipeline management perspective, the HIGH end of the range is of more concern than rally potential. To that end, 3.40 and thereabouts would be a perfectly reasonable this morning, and well in bounds. The bottom line is not to worry if bonds battle back and forth with weakness this morning, because it's likely to happen, and given the circumstances, almost completely inconsequential.

When the report was released with better than expected results, bonds indeed weakened, but in an uncanny turn of events, precisely to the levels we'd outlined moments before.

Ok... So that was a good call, but I'll be the first to admit that it doesn't put a definitive cap on yield levels going forward. It's not uncommon to see a concession (higher yields) heading into auctions, and the event risk posed by the FOMC announcement could complicate that issue. The more important point we've been discussing so far in the live chat this morning has been that whatever trading we see between here and FOMC is not as important as that which follows, for the purpose of assessing the overall tenor of the bond market.

In other words, bonds could trade in any direction this morning without implying anything about how they will trade after FOMC. If discussing the ins and outs of moment to moment MBS movements sounds like fun to you, come join the discussion (LEARN MORE HERE).