MBS AFTERNOON: Testing Nothing! Watch Your Step!

By: Matthew Graham

Perhaps "watch your step" is a bit misleading, as it could be taken negatively.  In this case, you'll be wanting to watch your step if you were walking anywhere near the recent floor on the 10 yr tsy.  For you see, there is now quite a large hole there, and while our friend the 10yr has not fallen all the way to mail room, he's at least in HR, or Accounting, or whatever might be a floor or two down.  But like LeVar Burton tought me on Reading Rainbow: "Don't take MY word for it..."

The story of MBS strength today is twofold.  First we have our ever-present leash leading to tsy's.  As they trade towards a flatter yield curve, we move down in coupon (as both are duration-friendly votes).  So in that sense, the overall fixed income sentiment is helping MBS.  Before moving on, it's also important to note we've had a firmer than normal ceiling in spreads over the past two days, as a relatively flat line can be drawn that intersects several intraday wides (wide and/or higher spread).  At each touch, spreads tighten and MBS gets a B12 shot (it's not quite pharmaceutical, but we see a bit of a difference).

Second part of the story relates to flows.  In short, would it be ok if I said "more buyers than sellers?"  Hey, don't shoot the messenger...  If the cliche fits, right?  In particular, Uncle Ben and money managers noticeably came in today at one of our above-referenced "touches" and tightened up spreads a bit too much.  You can see the result just before noon as we fall back down in line with the average uptrend in the MBS curve above.

Intraday floaters are good for now.  Even then, at this hour of the day, the market is looking to tomorrow and beyond as opposed to the rest of the day in terms of fundamentals.  In terms of flow, traders are reporting a bit of "selling exhaustion" which SHOULD prevent the spikier forms of profit-taking we've seen in the past.  So dare I say things look good for relative stability into the close?  Only if someone double dared me...  But do stay tuned as always.

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