MBS RECAP: Amazing Display Of Sideways Momentum

MBS Pricing Snapshot

(Reuters) - Minneapolis Federal Reserve Bank President Narayana Kocherlakota on Tuesday repeated his call for more monetary policy easing, urging the central bank to leave interest rates near zero until the unemployment rate falls to 5.5 percent.

Doing so would give the economy a bigger boost than the Fed's current promise to keep rates low until unemployment falls to 6.5 percent, he argued in remarks prepared for delivery to the Grand Forks/East Grand Forks Chamber of Commerce in Grand Forks, North Dakota.

His prepared remarks were virtually identical to those he delivered last week in Edina, Minnesota, and echo the thrust of an argument he first made last October.

"(M)y outlook implies that monetary policy is currently not accommodative enough," Kocherlakota said, forecasting unemployment, now at 7.7 percent, to fall only slowly to 7 percent by the end of 2014, and for inflation to continue to lag below the Fed's 2-percent target. "Monetary policy should be more accommodative."

The Federal Reserve may be able to reduce its bond-buying stimulus plan before the end of this year if economic growth continues to pick up and employment improves further, a top central bank official said.

Dennis Lockhart, president of the Atlanta Fed, said on Tuesday he expects the U.S. economy to expand a bit over 2 percent this year, though he does see some chance that the expansion could prove even stronger.

At the same time, Lockhart flagged short-term budget cuts from Washington as a risk to near-term economic performance. He also noted that the U.S. labor market, while better, remains only a shadow of its pre-recession self.

It continues to be a woefully sideways day for MBS. While this isn't a terrible thing, considering we're right in line with 1-month highs, it's not without its baggage. That baggage is currently being provided by the nearness of benchmark Treasuries to several relatively important technical levels

Yields of roughly 1.87% have come into play several times in the past week as support (meaning that 10's have encountered ceiling bounces around 1.87). More quantitatively, the 100 day moving average is 1.866, right on top of current levels. 10's have bounced around here incessantly since noon and while there's no major significance implied by volume (which is only "OK" today vs non-existent yesterday), it makes for a bit of tension in the air.

If 10's broke higher today, they might not do so in a major way, but it would beg the question: is this just the beginning? With more and more data and volume returning to markets post-Holiday, we've had more weakness in bond markets. The skeptical take on bond markets could quickly become something like this: "we only got another test of those 1.83+ long-term technical barriers heading into and coming out of low-volume, global holiday breaks, and with the pick up in data and activity, if the data is bond-market negative, yet another bounce at 1.83+ will be firmly reinforced. This would reinforce a ceiling bounce for MBS around 103-10 as well."

We're not saying that's what today's price action necessarily means, but simply pointing out the reason it makes us uneasy to be sideways at these levels. Tension is mounting for the rest of the week, which contains an ECB Announcement and Non-Farm Payrolls.