MBS UPDATE: Scientific Theories Tested: So Far So Good

Between AQ and I, the crystal balls appear to be functioning as expected today.  As AQ's foretold, we indeed did get smacked right back to earth with some profit taking following the initial rally.  And as the MG crystal ball suggested, we have been able to rally back up thanks to a much bigger rally in treasuries.

Why is this a "scientific theory?"  It goes back that which we mention on an almost daily basis: The current tendency is for MBS to TIGHTEN spreads when bond prices are FALLING, and to WIDEN spreads when bond prices are RISING.  Ipso facto, ergo, thus, therefore, when we saw MBS rally MORE than treasuries immediately following the announcement, it stood to reason, especially in the light of potential profit-taking, that those price levels could not be sustained or regained until/unless tsy's agreed to take the lead on this rally.

There was some stomach-churning uncertainty (which you'll be able to see in the chart below), but it now seems that this is indeed the case as the 10yr is up a respectable 15 ticks.  This has brought the yield there to 3.19 after being as high as 3.25% earlier today.  This update post coincides with a key "reassurance" I was waiting for on a technical level.  You can see the yield bottom out just after the minutes were released.  And then we held our breath as yields backed up, stocks advanced and MBS sold off, watching for a turn around.  Once the 10 yr yield began to drop again, I wanted to see it break the initial floor, which you can now see it has.  NOW THIS DOESN'T MEAN it's going to continue lower, but rather, simply eases tensions about the bounce of the low yields being a violent one which could negatively impact MBS for the rest of the day.

Long story short, we're out of the woods today.  Don't expect MBS to get any higher than the initial rally, but neither should you expect them to go much lower than the low PAR range.  Unfortunately, much of the market's response won't be felt until tomorrow since we are not even half an hour away from the official bond market close (even though MBS go for another 2 hours).  Even then, on this light volume holiday shortened week, yet more sentiment is likely to be felt next week.  But for now at least, we're good.  Reprices for the better are a possibility.  Reprices for the worse are not.