MBS CLOSE: Small Improvements Add To MBS Steadiness, But Auctions Loom
The only real piece of scheduled data today was the ISM Non-manufacturing index. It didn't do much to move markets. In fact, MBS had a fairly calm, fairly positive day.
Tsy's also stayed in a 7bp range which is a bit less volatile than many recent days.
Tomorrow we're basically without data as well. But on Wednesday, it's your old friend and mine: a treasury auction, this time in the form of 10yrs. This is the first major calendar item that threatens recent stability in MBS. As to whether it's more likely to do damage or harm, I don't have a stance, but it is significant that this is the market's first crack at 10yrs since they've regained their footing. It will be important to see if the recently steller tsy demand persists at the newly lower yield levels. Once would extrapolate a recent chance at that from 5 and 7yr results, but nothing is a given.
The recent regaining of footing is a phenomenon in which MBS have taken part alongside their tsy counterparts. After coming up off the lows, we've made it through some critical technical levels in tsy's, and FOMC statement, and more than a few additional auctions. Not only has the general trend been up, but the recent norm has been an increasing level of stability. However, don't confuse stability and indecision, because there's likely as much of the latter at play as the former. We made it through some tough times, but all the "searching for guidance" we've been talking about recently is very important. That "guidance" can go either way and it can come from multiple sources.
Economic indicators are more important now than in recent months as some of the attention grabbing headlines and speculation has subsided. We've said and will continue to say that the connection between scheduled data and bond price movements is becoming reestablished. Another barometer of the potential recovery would be stock prices. Recently, much attention has been paid to the S and P technical levels. We bounced of a much anticipated 888 level today in the S and P, as well as failed to fall through the "neck line" in a "head and shoulders" formation. Some say this suggests further upside potential (i show two possible constructions of the neckline in the chart below).
However, as I see it, we haven't made a big enough bounce to clear some important overhead hurdles. Sure this is apparent with the longer term day over day chart above, but even looking at the 2 day chart below, we can see a serious hesitance emerge as the index approached 900 (actually 901 was more like it most of the day). Likewise, we were only able to close at 898.72 today. There's no denying a huge psychological and technical significance (not as huge technically, but still something) to 900.
It's no surprise that in the absence of any real data and with tsy supply looming, one of the very indicators to which we are looking for guidance is, itself, looking for guidance! Oh cruel irony! And though it always seems like we're at some sort of crossroads, at least one of our two MBS flavors of the month has made it back into 2009's trading range. 4.5's on the other hand are almost there!
What, if anything, is the suggestion for the lock/float outlook? Really, it depends on which guidance (and it's all limited at the moment), you want to pay the most attention. I think that with the 10 yr auction being in the middle of the day, it's a pretty simple call on all of the inclined floaters to wait for that event. In the case of reprices for the worse, you should be able to act with enough advanced notice. But remember, this is NOT me saying "everyone should float until then," just those who, in accordance with their personal GUTFLOP's, are inclined to float in the first place. The equities technicians may indeed be on to something with today's bounce of 888, but I think that a combination of techs and fundamentals is the wiser choice, and the first day back from a 3 day weekend, no data for two days, and an important tsy auction on Wednesday?! Definitely seems like it would be premature to completely tune out those factors in a strictly technical analysis of the index.
2s vs. 10s: 256bps