MBS Week Ahead: MBS Roll; Which Way do We Go?

NOTE: Fannie and Freddie 30yr fixed MBS 'rolled' over the weekend.  The post-roll price of Fannie 3.0 MBS was 102-02.  That will look like a 10/32nds sell-off as far as charts are concerned, but prices did not 'go down for real.'  The 10/32nds drop is and was the difference between the just-retired month (April) of coupons and the current month (May).  Traders and secondary desks were already transacting business with the new May coupons.  We are simply shifting our frame of reference to the next coupon in line after the previous coupon fell off the conveyor belt.  All things being equal, these new, lower MBS prices would slowly work their way back up by the same 10/32nds by the time they're retired in about a month.  The next crop would then be the new representative for "MBS Prices," again making it look like we lost another 10/32nds, and so on...

Moving on to broader bond market trends, let's take a look at the relevant technical levels in 10yr yields.  Why 10yr yields?  One great reason is the fact that MBS prices are plagued by all that "roll stuff" discussed above.  That makes it hard to have a consistent discussion about technical levels.  Beyond that, Treasuries are just a better benchmark for the DIRECTION of interest rate movement.  Of course MBS are far better when it comes to translating movement to rate sheet changes, but Treasuries set the tone for MBS movement most of the time.

Looking back on all of 2015 so far, we're seeing a fairly clear trend emerge where 10yr yields have returned to the center of their trading range and have recently been looking like they have no idea where they want to go next.  In yield terms, the center of the range is near 1.93.  Important pivot points are fairly evenly spaced at 2.05 and 1.84. as are support and resistance levels at 2.15 and 1.71 respectively.

Long story short, until 10yr yields are breaking over 2.05 or under 1.84, they're really not doing anything.  Even then, they'd really need to be breaking 1.71 or 2.15 to be doing something other than continuing in the same 2015 range. 

The week ahead has several moderately important data sets, but nothing on the order of NFP (largely because nothing is ever on the order of NFP, other than NFP).  The closest we'll get is Tuesday's Retail Sales.  Even that hasn't been a consistent market mover of late, so there are no guarantees.  But somewhere in the rest of the week's data, markets could find enough meaning to start picking a side to come down on with respect to the 1.93 fence in the chart above. 

In addition to the scheduled data in the calendar below, there are also several Fed speeches with Wednesday and Thursday being particularly active.  (For the record, Wednesday: Fischer, Lacker, Bullard, and Thursday: Fischer, Mester, Lockhart, Rosengren).   Fed speeches don't generally move markets, but they always have that potential, especially if a consensus emerges that markets hadn't been fully pricing in to trading levels.