MBS Live Recap: It Can Always Go Either Way

If you're looking for today's recap, check out the Huddle.  Or just know that we sold-off a bit more and then settled sideways, fairly close to yesterday's highest rates.  Mortgage lenders dinged rate sheets just a bit more and we're now waiting to see the effects from tomorrow morning's jobs data.

If you're looking for what some might call wisdom and what others might call food for thought, the rest of this might be interesting.

There was one time in my life where I was sure that rates were going lower in fairly short order.  That was almost exactly 10 years ago this week when the financial crisis was just about to pop.  I felt super smart as 10yr yields plummeted from 3.8 to 2.04% in less than 1 month.  Just over 1 month after that, I was surprised to see 10yr yields moving back up and over 3.015% (a key pivot point at the time, and again today!).  

After all, I KNEW in my heart that the fallout from the financial crisis was worth a move to much lower rates, and that it was only a matter of time until we saw it.  To be clear, I was thinking in terms of days and weeks!

2009 and the first part of 2010 ended up being a long year for me as I coped with my first profound analytical wake-up call.  Was I just a bond bull who had convinced myself of my desired outcome?  Or was there something else going on?

As we now know, and as the phrase about the "market staying irrational longer than you can stay solvent" suggests, there was definitely something else going on.  I was right that we had not yet paid the price for the events leading up to the financial crisis, but I had very little respect for just how far markets would go to punish traders that got too far ahead of themselves.

When rates began falling in 2010, I began to feel vindicated.  I was just getting my sea legs back when the rate spike of late 2010 came back to make sure I got the point from early 2009.  That was the last rate spike I needed to see in order to adopt a constant vigilance about more dire possibilities. 

Those lessons helped me a great deal when the taper tantrum hit in 2013, and especially when European bond buying finally went live in early 2015.  A lot of people felt I was too bearish and too cautious  about the how high rates might go (and how quickly).  Arguably, 2016 showed up to teach me about the other side of the coin and drive the lesson home.

The lesson was that it can always go either way, and that's especially true when it seems obvious that things should be going the OTHER way. Whether you think there's a bias toward higher or lower rates right now doesn't matter.  Absolutely everything the market can possibly know about the future is already priced-in to today's rates.  Perhaps there's a bit of safety priced-in to account for the possibility that the employment/wage data surprises to the upside, but there's absolutely some line in the sand for tomorrow's data, above which rates would still likely be pushed higher.  As of today, you and I have no way of knowing if 10yr yields will be over 3.5% or under 3.0% in a few weeks or even a few days!  Both levels are equal possibilities.