MBS MID-DAY: Tough Calls to be Made Ahead of NFP

By: Matthew Graham •

At the end of this morning's commentary, I discussed the possibility that the past few days have been an over-correction to May's month-end strength, exacerbated by ECB-related volatility yesterday.  To be sure, this is a possibility, but I don't know if it's any more of a possibility than swimming safely across the Puget Sound in a swim suit made of seal meat.  The crowd that's calling for a bounce here, has been doing so since early May. 

The way I see it--and indeed, the way I think it's most logically seen--is that PART of the violence of the past 3 days has been due to the tradeflow correction between late May and early June.  The OTHER PART is the legitimate risk of further weakness.  If we were only dealing with the over-correction, we'd want to see bond markets moving farther back into their previous range, instead of keeping a healthy distance.

For example, the previous high close for 10yr yields until yesterday was 2.282.  It was a focal point for intraday support as well (that means yields bounced around that level quite a bit in May as they tried to find their footing).  In short, it's the best-established threshold of May's range.  If we were returning to May's range after over-correcting yesterday, we'd want to see something better than an intraday low of 2.303.  Because that just looks like a bounce that confirms we're breaking out of the range.

Two caveats:

1. The day isn't over yet.  Well, actually it is over if you look at trading activity.  Everything domestically was tied to Europe.  Volume dropped off a cliff after German Bunds closed.  Even so, it's conceivable we could rally enough to get back near 2.28, but not looking likely.

2. NFP tomorrow.  It could easily bring us back into the range, or just as easily make the range a distant memory.

The tough call: roll the dice with your seal meat swimsuit or...  well, I guess it's not really a tough call.  Sure, you might totally make it without getting eaten, but it doesn't make a ton of sense to try.

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
99-28 : +0-08
FNMA 3.5
103-12 : +0-08
FNMA 4.0
106-02 : +0-05
Treasuries
2 YR
0.6730 : +0.0000
10 YR
2.3230 : -0.0376
30 YR
3.0540 : -0.0470
Pricing as of 6/4/15 1:02PMEST
Morning Reprice Alerts and Updates
A recap of Alerts and Updates provided to MBS Live subscribers.
11:48AM  :  ALERT ISSUED: Negative Reprice Risk Deceptively Present
10:10AM  :  Bond Markets Holding Modest Gains After Overnight Roller Coaster
Live Chat Featured Comments
A recap of featured comments from the Live Discussion on the MBS Live Dashboard.
Sung Kim  :  ""seems""
Victor Burek  :  "this bond sell off seems so over done"
Matt Hodges  :  ""seems""
Sung Kim  :  "today seems like a good day to lock"
Matthew Graham  :  "When the chart is that big, a regular sized line is covering up at least a few bps of y-axis, anyway. Hopefully that makes sense."
Matthew Graham  :  "yes RW. On such long term time scales, it's OK to think of those inflection points as a small range of yields. In this case, probably 2.34-2.42"
Roland Wilcox  :  "MG the "terrified break" inflection point -- 2.35?"
Michael Dormer  :  "Follow-up: If NFP just comes in "Meh," then what does our proverbial runner do, in all likelihood? This seems like a weird price point for bonds -- gotta move somewhere, right?"
Matthew Graham  :  "RTRS - IMF SAYS FED RATE HIKE SHOULD BE DEFERRED "UNTIL THERE ARE GREATER SIGNS OF WAGE OR PRICE INFLATION""
Matthew Graham  :  "RTRS - IMF SAYS U.S. FEDERAL RESERVE SHOULD DELAY ANY RATE HIKE UNTIL FIRST HALF OF 2016"
Victor Burek  :  "IMF is trying to influence Fed to hold off on rate hike til first half of next year"
Matthew Graham  :  "RTRS- US CONTINUED CLAIMS FELL TO 2.196 MLN (CONS. 2.208 MLN) MAY 23 WEEK FROM 2.226 MLN PRIOR WEEK (PREV 2.222 MLN)"
Matthew Graham  :  "RTRS- US JOBLESS CLAIMS FELL TO 276,000 MAY 30 WEEK (CONSENSUS 279,000) FROM 284,000 PRIOR WEEK (PREVIOUS 282,000)"
Matthew Graham  :  "RTRS - FED'S TARULLO SAYS THERE ARE MORE QUESTIONS AT THIS POINT IN 2015 THAN THERE WERE IN 2014"
Matthew Graham  :  "RTRS- FED'S TARULLO SAYS WE NEED TO SEE WHETHER DATA POINT TO DEGRADATION OF PERFORMANCE, OR WHETHER THEY BOUNCE BACK"
Matthew Graham  :  "RTRS - FED'S TARULLO WE HAVE LOST SOME MOMENTUM IN UNDERLYING PERFORMANCE OF THE ECONOMY"
Matthew Graham  :  "RTRS- FEDERAL RESERVE GOVERNOR TARULLO SAYS WEAKNESS IN Q2 MAY NOT BE AS TRANSITORY AS LAST YEAR"
Matthew Graham  :  "Smartest Fed comments I've seen in recent memory"