Stock Lever Helping Bond Markets. MBS Improve

Today has been like an oasis of relatively stable positivity for MBS.  If you look at the last two weeks as an indicative of the nature of the MBS market these days, it's been a scorched wasteland of pain and suffering.  Things got pretty bad on more than a few occasions, and MBS matched their lowest levels in over a month as we Friday drew to a close.  So we were destined to either bounce back a bit or spiral into oblivion.  Thanks to Merkel and Schauble's sober comments on a more temperate EU Recovery before our domestic session opened, we got more of the bouncing and less of the oblivion...

Why were the comments out of the EU important this morning?  In essence, markets had been upbeat about the upcoming G20 meeting this weekend, and a few of the heavier hitters in the EU financial scene (Merkel = Chancellor and Schauble = German Financial Minister), basically said "not so fast everyone!"  Here's some more from Reuters:

(Reuters) - Global stocks and the euro fell on Monday after Germany dashed expectations of a breakthrough to the euro zone debt crisis at a highly anticipated upcoming summit of the European Union.

German Finance Minister Wolfgang Schaeuble said that even though European governments would adopt a five-point platform to address the two-year-old crisis, a definitive solution would not be reached at the Oct. 23 summit.

The remarks took the wind out of recent optimism that had sparked a rally in global stocks of more than 10 percent in just nine days and had pushed benchmark 10-year U.S. Treasury debt yields to post their best three-week advance since late December.

Shares in Europe and the United States retreated and crude oil extended losses. The euro slid from a one-month high against the U.S. dollar touched earlier in the global session, falling 0.9 percent to $1.3756.

"There's nothing but uncertainty in Europe," said David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.

Today's bounce can also be looked at technically, but whatever the case, it's clear that whereas "risk" had been in fashion over the past two weeks, at the very least, it's taking a bit of a breather this morning.  The whole concept of risk-on/risk-off as a broad and general way of looking at market movements recently is well-supported by the well-connected stock lever.  So it's no surprise to see stocks down today as well as TSY yields:

If that 2.25 area (1220 in S&P) looks like a bit of a ceiling, that's because, well... it does look like a bit of a ceiling.  Too soon to say whether or not it definitively is, but it's not too soon to say that both equities and Treasuries are trading very technically, with each paying attention to similar extremes of their respective ranges recently.  The technical behavior tends to become more prevalent as uncertainty increases, and these are certainly uncertain times, but it extends all the way to the minute to minute trading on shorter term time scales as well.  Here's a chart from back on 10/7 that showed a visual of how a security can test, break, and confirm a move outside a trendline:

While that chart refered to longer term movements, the same sort of behavior can be seen in a short term chart of today's 10yr yields:

And while we did already discuss 2.18 in this post, as a horizontal tecnical level, we also noted in this post that "In the bigger picture though, we'd probably be more excited about a break below 2.11 and more concerned about a break above 2.23 on the high side."  It's interesting to note that TSY's haven't hit a 3pm Close higher than 2.23 or lower than 2.11 since that statement was made as evidence of just how technically the market is trading.  So although we got our bounce of 2.18 today, again, we'll be more excited about 2.11.