MBS Day Ahead: Month-End and Improving Technical Possibilities

No single method of market analysis is always better than another, which is why it's always better to consider as many as possible and look for agreements.  In other words, if technical analysis and fundamentals are both saying the same thing, the conclusion is stronger.  Pretty simple.

That's essentially what's going on today, though the technical reading is not quite ready yet.  Ideally, we'd like to see a positive day today in order to confirm a turn in the technicals.  In simpler terms, that means that if bond markets improve today, it increases the odds that we can scratch out a few more improvements in the following days.

Yesterday did us the favor of confirming that economic data is not on our radar.  GDP and Jobless Claims were both solid and there was zero bond market reaction.  Wednesday showed us that markets aren't much interested in trading Fed policy at the moment either, so that leaves tradeflows and technicals.

Tradeflow momentum can be thought of as all the trading that has to occur out of necessity rather than opportunity.  For instance, if a pension fund is required to hold a certain amount of Treasuries based on a published index, and if that index is updated for the month, the fund will have to buy or sell Treasuries accordingly.

Incidentally, that scenario and other iterations of it are common heading into the end of the month and they create a good amount of trading motivation that we'll never witness in the form of a market moving report or headline.  All things being equal, the end of the month has a bit of extra support for bond markets vs negativity.  Of course other factors can outweigh that supportiveness and its timing isn't always relegated to the very last day of the month, but the point is that it increases the odds of positivity.

So here we have a tradeflow environment that increases the odds of positivity and a technical landscape that is ripe for reversal.  Let's hope we get it.  On the other hand, if we don't get it, I'd be feeling more defensive heading into November.