MBS Day Ahead: Not Without Hope, But Defensiveness Makes Sense

You might have detected a more bearish tone in my opening thoughts for March, titled: Refocusing on Data as March Begins.  If you didn't read that, or don't care to, the gist is that much has recently changed in terms of the "stuff" that had helped bond markets up until early 2015.  Traders wasted no time in driving this point home over the past two days.  With ECB QE a done deal, Greece on hold for months, and some signs of life in the last reading on wage growth, it makes much more sense for traders to be defensive about how bonds might move higher than to be aggressively betting on another move lower.

The scariest 3 days of the week begin now, and I think much of current weakness reflects the apprehension that these 3 days could validate the defensive stance mentioned above.  Obviously, there has been an elephant in the room with respect to the huge corporate bond issuance, but ultimately, that's just another argument in favor of a defensive stance.

So the doom and gloom can be taken 'as read' from here.  Be sure to stay safe with respect to that, but beyond the tactical necessities, it's worth remembering that the defensive stance has a hidden benefit.  It allows us to approach the next 3 days as an underdog.  If reality doesn't end up validating the level of defensiveness, we'll get a good chance to see where we really stand without recent strategic trading considerations muddying the waters.  Again, that doesn't mean you should avoid locking because we're guaranteed to bounce--simply that the recent weakness doesn't yet spell certain doom.