The Day Ahead: Picking Up Pieces or Making More

Yesterday was the worst day for MBS and mortgage rates since 'Black Wednesday,' on May 27, 2009.  A lot has changed in those four years and a lot of the most significant parts of the most significant change has happened in 2013 with the month of May being the main staging area for such things, followed closely by January and February.  The significant part in question is the Fed's guaranteed sponsorship of bond markets that began in 2009.  

We've seen some major market swings, owing at least in part to the pricing-in and out of what we sometimes refer to as 'Fedspectations'--a catch all term for the expectations surrounding potential Fed Asset Purchases, its effects, and more recently, its abatement.  That last bit "got real" to a greater extent in mid-May, coming to a head with last week's Bernanke testimony on Wednesday.  

Even before that, the Jobs report on May 3rd was a wake up call for a bullish trend in yields that was--at the time--offsides with respect to longer term trends.  It's not unreasonable to think that part of the fervor with which bond markets have weakened is attributable, in part, to the pendulum swinging back from that extreme.  This offsides position is seen in the chart below in the teal circle.  A rush to neutrality would be the move into the red circle while the white circle is open to interpretation depending on how the upcoming few sessions pan out.  It could end up being the same sort of "offsides" move that we saw in the teal circle.  It could be merely a bumpy landing on the other side of the trend, or it could be something worse.  In any event, it's not good.

Looking at longer term charts, the 'not-goodness' is especially palpable if the current move does anything to confirm a break above the teal line.  The red line is the 500 day moving average--something we tend to stay below in the past 3.5 decades of improving interest rates.  Breaking it also tends to see follow through to higher yields when we've been below for as long as we have, but we'd be the first to admit that moving averages are far from being useful when it comes to predicting the future (more of a 'sign of the times').  

Speaking of 3.5 decades, we'll be seeing a lot more of the 3.5 MBS coupon if 3.0s keep acting like this (now with convenient decoder labels for the 4 recent 2-pt  quadrants of Fannie 3.0s)...

There is no significant data on the calendar today and the only meaningful event hits this afternoon with the 5yr Treasury Auction at 1pm.  Between now and then, anything's possible, and we'd assume things can continue to get worse until further notice, with elevated volatility through next week's NFP Friday.