MBS CLOSE: Feeling Really 'Vexed
Our first instinct is to take "vexed" at it's literal meaning, which no doubt applies to many of us today. More appropriately though, today's pain is a story of convexity selling. This started modestly enough, but kicked into high gear after the tsy auction announcement came in at a "shocking" $104 bln compared to a $101 bln consensus. AQ has talked quite a bit on this phenomenon in recent days and weeks. To refresh, every time benchmarks back up in this current environment, it causes fear that they will rise quickly enough that no amount of spread tightening for MBS could keep current mortgage rates low enough to entice borrowers whose loans are securitized as 4.0% MBS to ever want to refi. Now those investors holding that MBS are "stuck" earning today's lower yields when the rest of the market is operating in a higher rate environment. So the lower the MBS coupon, the more haste with which it is cast into the fire. That's why you have 4.0's losing over a point today while 6.5's only lost 5 ticks. "Duration-Shedding" is another way to describe it.
I hear more buzz these days about "so and so is long volatility" as well. Volatility isn't good for duration either. To a respectable extent, the increasing momentum in volatility expectations could go a long way to back up the yields in the longer duration bonds at the moment. Economic recovery notwithstanding, take out some of that volatility, and not only do the benchmarks themselves have room to come down a bit, but all manner of spread could tighten as well. As simply as possible, we're paying an uncertainty premium at the moment. Just a speck of light in the gloom.
The bigger spec of light would be that today didn't really matter as far as the bigger picture is concerned. Certainly it mattered quite a bit for many of us in some immediate ways, but I'm talking about with respect to what the day says about where all of this volatility is going. Today doesn't say much of anything. In fact, nothing will until Ben and Co. hit us with the minutes on Wed. Even then, there's an equal chance that the "digestion" and decisions about what is said will take days more before causing a momentum change in market psyche.
AQ's morning post was so great, I'd rather have you read that again that to talk much more about market forces right now. Nothing happening tomorrow on the economic calendar, BUT, it's that old Quadruple Witching day everyone is so fond of discussing yet no one can explain. Something to do with options expirations? I don't know.... Can't see how it would matter much anyway if you're planning on coming to work on Wednesday.
As far as techs go, we MAY be able to have some fun there at least. We are RIGHT ON opening levels from the 12th in both tsy's and MBS (for the most part). And even the 10yr futures contract AQ and I talked about this AM before I posted panned out pretty darn well at that 3.82 level, closing insignificantly higher at 3.83 and currently at 3.81. Maybe she'll hold! Oh wait... Forgot.... I don't care about that until Wednesday....