MBS RECAP: Drifting Into the Weekend Near Unchanged Levels

It was an intensely soporific trading session today.  Bonds started out in positive territory and then began a slow, steady grind back toward unchanged levels.  On the week, the trend was moderately weaker and completely lacking in conviction.  Trading direction was serendipitous in the short term, but mechanical and technical in the slightly bigger picture. 

In other words, there were no overt motivations for rates to be moving, but once they began moving, it was the technical boundaries of the trend that suggested the bounces.  The only exceptions to this phenomenon were the 3 and 30yr Treasury auctions.  Had it not been for those two events, the week may well have been completely flat.

As for today itself, there was Import/Export data in the morning, but no market reaction.  The 8:20am CME open brought the only early momentum--a clear sign that markets are tuned out from fundamentals and that tradeflows are in control.  More simply put, prices/yields were being driven by trading needs/goals without regard for underlying economic fundamentals or headline developments.  A simple example would be a trader that went long (bet on rates falling) after yesterday's auction seeing that rates crossed over the pre-auction levels and consequently sold to book a profit.  Indeed this example is just the sort of thing that contributed to this morning's bounce at the low yields of the day.

MBS, for their part, had a sideways week due mainly to the monthly coupon cycle.  All things being equal, MBS get about 10/32nds of outperformance every month and then give it all back to break even on roll day.  With the roll coming up next week, it's no surprise to see MBS holding steadier in the fact of modest Treasury weakness.