Stock Lever Engaged. MBS Price Volatility Abundant
There are cuter couples out there, but if today's stock lever performance is used as a benchmark, none are more closely joined.
Far from holy matrimony, this relationship between stocks and bonds is all about the uncertainty that pervades markets amidst the deluge of economic data, headline news, geopolitical risk, budget battles, Fed Policy speculation, Trasury auction supply, and market technicals just to name a few. We've rarely seen the two with a higher degree of positive correlation. The connection of the stock lever to bonds enables us to observe not only fixed income market technicals, but stocks too...
Perhaps the ongoing struggle of the S&P right at the extremely important 1333 level is adding to the pervasive sense of uncertainty in the bond market? Just picture the two markets as youth soccer players... The ball has been kicked high into the air and the two youngsters have their hands on each others shoulders with their eyes toward the sky, neither looking at the ground in front of their own feet, but ensuring they stay close enough together so that when the next stage of the game happens, neither has over-committed in the wrong direction. Uncertainty at it's finest...
By way of a specific market update, TSY's and MBS are at roughly UNCHANGED levels on the day, though have seen plenty of QUICK movements to the relative extremes of their trading ranges. Treasuries and stocks cruised into the morning sideways ("1" in the chart below). Stocks began the break higher ("2" in the chart below), but when the Japan news hit ("3"), the two markets began acting like the proverbial youth soccer players mentioned above.
With respect to MBS, the price volatility seen in benchmarks has translated directly into production MBS coupon, but has been amplified by several factors, some inherent to the MBS market itself, and some more transitory, such as the general "day trading" theme that has been prevalent recently (I strapped a mattress to the top of my car to account for a higher than usual amount of MBS traders jumping from windows. You'd jump too if the most liquid security in your area of expertise charted like this:)