Reassuring Rates Rally Gives Pause to Bearish Bias
Risk trades were peeled off today and the bond market rallied. The directional move was more than welcome by bond bulls as it served to stave off an all-out bearish technical breakdown.
The rates rally took shape in above-average overnight trading volumes following a series of bond supportive news headlines. Aiding the rates recovery was weakness in equities that sold off around the globe , leading a flight to safety into government bonds. This forced the yield curve flatter as fast money short positions were covered in advance of a $32 billion 3-year note auction, which went well thanks to what seemed like an inventory-starved herd of primary dealers. Unfortunately the recovery rally failed to gain more momentum in the aftermath of the auction process as profits were quickly booked to make room for tomorrow's $21 billion 10-year note fundraiser. Profit taking or not, a clear message seems to have been voiced by market participants today : MORE SIGNS OF AN ECONOMIC RECOVERY ARE NEEDED IF RATES ARE TO BREAKOUT BEARISHLY
Plain and Simple: Until then we must treat this market behavior as range trading......
On March 11th we wrote, "Lots of headlines to digest lately. What region is the market focused on again? North Africa, the Middle East, Spain, Portugal, Greece, China, Japan, the U.S.? What trade is the market working right now? Long Oil? Short Stocks? Long Gold? Short Bonds? Short the Dollar? Wait. What about economic fundamentals? Expansion? Contraction? Inflation? Deflation? Reflation? Rate Hike? QEIII? Certainly enough to make you wonder what's priced into asset valuations and what isn't priced into asset valuations"
On March 25th we shared the following Plain and Simple: "The market has largely ignored economic data and breaking news headlines all week. Investors have instead based their decisions on trading technicals... which are now looking bearish. Unfortunately while our gut tells us this back-up is temporary, our brain forces us to remind you of what's currently moving the bond market: TECHNICALS."
The day before that we offered this guidance, "If 10s failed to stick below 3.40%, trading technicals would lean in favor of the bear camp and a range trade between 3.40% and 3.70% would be on the table."
Those observations are still very relevant. The many issues that plagued traders' perspectives of "value" back then still plague their perspectives now. The future is just as unknown as it ever was, assumptions are still based on assumption. Uncertainty is abundant.
Plain and Simple: Directionally this rally was supportive of the range but it doesn't mean we've shifted our bias bullishly in favor of a trend toward lower rates. Our guidance is still very focused on technical pivots and highly-trafficked inflection levels. Until the market commits to a bias, we will remain defensive of any rally in the context of the broader trading range. We've outlined key inflection levels and highlighted highly-trafficked pivot points in the charts below.....
As for MBS directional guidance givers, the benchmark 10-year note, we see the range in 10s between 3.40 and 3.70%.
Today's rally confirmed the case for strong support at 3.60%. If rates were to retest 3.60% and support broke down, we'd anticipate a move toward 3.70% and possibly even 3.75%. If 10s manage to break through 3.50% resistance (check out that Fibonacci Fan!) we'd look for a retest of cluster resistance between 3.40-3.42%. At that point, barring a major shift in economic outlooks we'd be watching for profit taking and an uptick in short selling. We anticipate strong pushback at 3.40-3.42% without GDP downgrades, weaker earnings outlooks and fewer inflation hawks.
We're gonna keep this very simple. The range in FNCL 4.5s is wide... between 102-24 and 100-20. The wideness of the range carries several implications for mortgage rates.
We don't see C30 Best Execution Mortgage Rates improving beyond 4.875% without a SUSTAINED breakdown of range resistance at 102-24 in FNCL 4.5s. At current indications the C30 Best Execution Mortgage Rate is 5.00 to 5.125% depending on compensation plans, regional servicing values and lender competitiveness. If the FNCL 4.5 rallies through 101-16 resistance, C30 BestEx should improve to 4.875 - 5.00%...again depending on compensation plans, regional servicing values and lender competitiveness. A move through 100-20 support would lead C30 BestEx up to 5.375%...once again depending on compensation plans, regional servicing values and lender competitiveness.
Plain and Simple: Directionally this rally was supportive of the range but it doesn't mean we've shifted our bias bullishly in favor of a trend toward lower rates. With a high degree of uncertainty still surrounding market fundamentals, our guidance remains very focused on technical pivots, momentum and highly-trafficked inflection levels. Until the market commits to a technical bias, we will remain defensive of any rally in the context of the broader ranges outlined above.