MBS LUNCH: Encountering All Manner Of Resistance

By: Matthew Graham •

Resistance abounds....

  • Yesterday and today, the 5.0 encountered a floor around 101-17 to 101-18
  • Thus far, 5.0's unable to crack a ceiling at 101-24 (1 tick up on the day at least!)
  • 10UST wasn't willing to crack 3.6, despite numerous tries, but now appears to be facing resistance on the downside between 3.54 and 3.55
  • The S&P (we're making a change on our default charts for reasons we may or may not discuss later), hasn't wanted to close above 928 and is currently trading RIGHT THERE.

Why all the "range" recently...?  Why all the technical patterns?

AQ alluded to it this AM with the notion of "seeking guidance."  That's it folks!  We have a little bit of an anti-climactic, post-traumatic stress identity crisis.  With the FOMC announcement and the epic battle for a 3% handle on the 10yr tsy behind us, everyone is asking: "what now?"  Indeed...

As we've said, data plays an ever more important role in such an environment.  This can be readily witnessed in the much-more-rapid-than-normal responses of MBS and Tsy prices to the AM economic reports.  But so far, there hasn't been an earth shattering revelation about the most important bond market considerations: extension risk and an economic recovery.  The two go hand in hand really as the increasing prospects for recovery also increase the fear of duration (extension risk).  Remember that when we're scared of holding duration, we dump the low coupon MBS and the long term tsy's.  Bad for rates... 

For once, it's really as simple as that...  There are the same old knives in the air...  How soon will the economy turn?  How rapid will the recovery be?  Have we overspent in terms of quantitative easing?  Will there be enough demand for all this tsy supply?  Will the government be able to stop pushing the bike and let 'ol Junior ride down the street on his own?  Yada yada yada...  And for those that might argue that I shouldn't just "yada yada" the future market moving uncertainties...  I just did.

It's time to hurry up and wait.  What does it mean for your pipeline and the lock/float outlook?  "Defensive" was a good word from AQ's morning post.  But 'defensive' doesn't necessarily mean pessimistic, simply "utter preparedness and understanding that prices could move down very quickly."  As mentioned by AQ, there's probably more immediate downside than upside if such a violent change were to occur--at least until we've had some time to consolidate our recent gains and let our team of economic bears go to town on the bulls.  I just hope our bears are up to the task.