MBS CLOSE: Few Surprises As "PAR-Nertia" Prevails

By: Matthew Graham •

Today was the tamest we've had since Black Wednesday in terms of price fluctuations.  With one small exception around 11AM, we were confined to a roughly 6 tick range which narrowed as the day progressed.  On observing some developing patterns, one website noted earlier today: "At least to the book close today, this gravity should remain, putting us out around PAR, a little above in the case of an upside triangle breakout and a bit below for the opposite."  Oh wait...  Well...  Regardless of the source, this was indeed the case as illustrated in the daily chart below.  Note the narrowing trading range throughout the day in addition to the numerous "touches" on both the 100-02 level and the uptrend line.  Despite an upside breakout, notice "PAR-Nertia" bringing prices back down to coincide exactly with the uptrend.  Remember!  The fact that we drew this triangle earlier in the day doesn't mean it was destined to happen, but rather, the fact that it DID happen is a vote in favor of range-bound technical trading patterns....

This was a mere 5 tick gain on the day, but we'll take any kind of green we can get after the treatment we've received recently, right?  Here is the rest of the stack.  Treasuries, on the other hand, had a bit better run, especially in the long end, rallying off the worse-than-expected economic data.   Stocks suffered in lock-step all day until 330pm EST when they regained around 80 points in 20 minutes (80/20 rule?  No thanks...  More economic reality inspired sell-off's please).  Put to print, it looks like this (Interestingly enough, regarding the 10yr yield, that same website said: "3.54 to 3.55 range feels "floorish" today."  Touche other blogger guy, touche...):

 

So the 4.5 MBS can't just stay at PAR forever though right?  Right.  "Something" will happen "some time" (going out on a limb there).  The eternal question is "what, when, and how much will it cost me?"  So far, we've retraced about half of Monday's losses about a third of Black Wednesday losses and about a quarter of losses since our beginning of the downtrend a few days before.  Graphically (added some trendlines on the downside and upside...  Looks like "decision time" coming up shortly, no?):

Whatever ends up happening, two things are true: it "feels" like there should be more upside and whatever upside there is will, in large part, mirror the yield curve (barring industry specific tape-bomb).  In other words, it would be really swell if the markets would cop to the "W" shaped recovery as opposed to holding on to this "V" garbage.  I don't think some further stock market pain is in question as the bullish data fueling current recovery hopes ignores some important bearish data.  A pertinent example cited by Deutsche Bank today would be Q1 profits.  They note the first positive reading in 7 quarters was driven largly by the financial sector (which came off such bad profits that it's still 20% down year over year), whereas the "domestic non-financial" sector continued to fall AND at a faster rate.  So there's the headline, then there's the reality upon some deeper digging. 

DB also notes a strong positive correlation between the domestic non-financial profits and tomorrow's jobless claims report.  This is the meat and potatoes of tomorrow's scheduled releases, hitting at 830AM with a consensus of 620k, very close to the last reading of 623k and producing another tick higher in the already eye-watering "continuing claims" to 6.87 million.  But the rest of the calendar is far from empty.

  • 830 AM, Productivity and Unit Labor Costs forcast at +1.2% and +2.9% respectively
  • Tsy announcement for 3's, 10's, and 30's, still estimated at $64 bln (not as big of a deal as auctions, but deviations are wavemakers nonetheless)
  • Cleveland Fed's Pianalto speaks at "some conference" (well, we know it's the INVESTKentucky conference, but didn't think that sounded as important as "testimonies before congress" and the like).  That happens at 800AM
  • NY's Dudley on TALF at a PPIP summit in NY
  • Dr. Ben Again at 845 at "some conference" (Journal on Money, Credit, and Banking Conference on Financial Markets and Monetary Policy...  You just had to ask...)
  • Obligatory Thursday report of Fed MBS buying that is a moving target time-wise, but usually in the 4-430pm time frame.
  • May Prepay Data (this is a biggie, but won't impact trading tomorrow except insofar as "expectation" as it's released after hours.

 

And that final bullet is a good segway for a conclusion...  With all the sights and sounds (good and bad) to occupy our attention, it's easy (compared to recent months) to forget this is the traditionally supportive MBS week.  Will that matter as much considering we're pushing the spread envelope?  Meh...  Perhaps not as much...  Still, tomorrow's prepayment report combined with a higher or lower than expected reading on NFP, in addition to convergence on our post-Black-Wednesday Triangle, has the potential at least, to make for quite a weekend.  Whether it's good or bad causes the magic 8-ball to say "outlook uncertain."  Thankfully, we have tomorrow to prepare, and those inclined to float overnight have a better than 50% probability of finding that move worth the risk, at least as far as the relatively wide closing spread values indicate.  A word of caution though: if jobless claims surprise to the upside, it might be "just the beginning" of stock rally that sparks tsy selling back up to recent high yields, taking MBS right along with it.