"Risk On" Comes Out Swingin'. MBS At Lows Of The Year

Fannie 3.5 MBS are in line with Friday morning's worst levels which marked the lowest prices of the year.  The theme so far today has been decidedly "risk on" as stocks are in full blown rally mode and bond markets full blown sell-off mode.  Each time bond markets have consolidated with the impression that they could bounce or break weaker, they've broken weaker every time.  

As expected, things have been increasingly volatile since 10yr yields broke over 2.13. This morning's price action took a turn for the worse after the Greek CDS auction pricing was released.  Despite weakening, bond markets had a chance to hold their ground there but failed.  An alert from MBS Live noted:

"We'd keep an eye on a narrow band of technical levels in Fannie 3.5 MBS at 102-10, 102-08, and 102-06. Breaking lower through these would be like a "bad, worse, worst" in terms of negative reprice risk. For guidance from 10yr TSYs, we'd hope for a break below 2.305 as a positive indication and to hold 2.323 support on the upside. Crossing higher would be a negative indication although we were as high as 2.332 earlier this morning."

As you can see in the screenshot above from the MBS Live Dashboard, the break of 2.323 coincided with the break of 102-06 in MBS and things worsened, quickly heading to important support in the mid 2.35's in 10yr yields and 102-03 in Fannie 3.5 MBS.  The next screenshot is from around 10 minutes later when both of them had broken taking MBS to their weakest levels of the year, under 102-00.

Here's a more detailed look at the technical developments in just 10yr Treasuries over the past 3 sessions.  I commented on this morning's bounce in the Live Chat channel on the MBS Live Dashboard:

"very very ugly, disconcerting resistance bounce of 2.265 in 10yr yields. That leaves us with an incredibly high volume/high regularity grind against 2.265 on Thursday, and another bounce or five in the wee hours of the overnight session, culminating in a big volume bounce this morning in the ostensible absence of fundamental motivation... "

That ugly, disconcerting bounce just over 2.26 was followed by another as 10's failed to make it back below the 2.305 level noted above.  This chart should build the sense that the market is trading less on fundamentals and more on technicals and tradeflow considerations.   That makes Fed's Dudley eerily pertinent this morning in saying the "financial world has moved from 'more genteel' business of investment banking to the 'less genteel' business of trading."  In short, rather than logical forces, hiding in plain sight moving markets, we're left with the phantom forces that can't be as easily quantified or discovered.

The longer term chart still leaves some hope for 2.42 support, but honestly, we've heard so many people reference this as likely support that it's starting to seem like too popular a stance to evolve into reality.  But who knows... maybe if enough people believe they're supposed to step in with bid-side support at 2.42, someone actually might.  Hopefully, the popular opinion ends up being right on this one.  The sooner we put in a definitive high, the sooner we can hope for some abatement of this volatility.

In terms of Fannie 3.5 MBS, the trading has been similarly technical.  Here, we're hoping to see this upper zone of 101 prices hold up as some sort of technical support.