MBS CLOSE: Would You Believe "Just Over Three Eighths?"

When all was said and done today, the 4.5 coupon lost just 13 ticks after being as weak as 27 ticks down at one point this AM and 25 ticks down at a recurring low (as in it happened more than once at different times of the day).  12 ticks being three eighths, the actual amount of secondary market value, which over time, should be a direct correlation to YSP, 13 ticks would result in a .4 hit to YSP or just over .375.   Seems a bit anticlimactic in the face of a barn-burner of an NFP print and even a small improvement in the U/E rate.  Of course the differences in our rate sheets today far exceeded that owing to weaker prices in the AM and even the handful of reprices coming in this afternoon have not gotten us back there yet, but you know how it is when prices worsen.  Still, considering the call volumn at the LO suicide hotline this AM, to a surprising extent, we're still standing, but what do next week and weeks beyond hold?

One benefit about next week is that this week will be behind us. It was one long downtrend from start to finish.  We also have suffered on occassion of late due to the opacity of expectations.  Is NFP REALLY going to jump back on the improvement wagon?  Or is there another leg down coming for economic indicators?  For many, today's report was a milestone in the mozaic of sentiment that has slowly and sporadically been coming into focus.  Some bets were hedged for it, some against, but the charts and the price action on the day tell us that a majority of the betting contingent of market securities have been on the right track this week.  What do I mean?  Consider, if you will, the fact that BOTH the 10yr and MBS curves on the week fall almost exactly in the middle of their trend channels (moving trading ranges) on a 5 day chart (we gave MBS a modicum of grace this AM, but not much)...

This week of big selling hasn't done irreversible damage to the longer term charts either.  Book values in tsy's were in line with their post FOMC mid june spike at 3.84 (ish).  The bigger deal would be just overhead at 4.0...  More importantly, the 10yr futures contract is exactly in line with it's june lows of 115-00, and has fallen in a nearly as precipitous manner as prices fell in early June.  This has almost always suggested a rebound, but of greatly varying extents...  We could be talking about as little as a day or two, or the 115-00 level could form a triple bottom in concert with the two lows from June.  This COULD (no leaning one way or the other), get support from the stock retracement that certain pundits seem to think is more and more inevitable the higher and higher stocks go...

Help may come from an unlikely ally in the form of next week's refunding auctions as recently the auctions themselves have actually helped to reverse some of the panicky damage done by announcements.  But those precedents didn't frost the weekly cake with this kind of NFP print or the ever higher altitudes of Major Tom's Stock Rally Spaceship.  Ground Control keeps calling him back, but he's apparently taking cues from the Energizer Bunny at this point.  So even though we got a lot of the guidance we were waiting for, there's always more to come, but before you start yelling at your computers saying "MG and AQ are ALWAYS saying we're waiting for guidance... When are we NOT waiting for guidance...!?!?"

Remember that this phenomenon will not simply come and go.  Last year, we were not waiting for guidance.  With MBS spreads THREE TIMES higher than they are now, overbought stocks, a stock market collapse that had been on our radar about a year, and what seemed like a sure-thing promise that SOMETHING would come along and bail out the MBS market, we were pretty sure rates would go from low 6's to high 4's in the winter.  Boy to be back in those easy analytical times!

But even in this state of flux and even though the NFP guidance was not in our favor, there is a paradoxical benefit there.  Simply, a big unknown has been removed from plates.  With May and June's mixed signals from the NFP and plenty of other reasons to doubt the nature of the recovery, today seals the deal for many a market participant.  "This is it (they are thinking).  We truly are on the path to recovery."

Maybe it's as good as the optimists hope and maybe there will be a harsher leg down than even the "it's just a bull market correction" crowd wants to see, but whatever the case, UNCERTAINTY LEAVING THE TABLE CREATES A MORE STABLE ENVIRONMENT IN WHICH MBS CAN OPERATE.  So much of the POSSIBILITY of a good NFP print worked it's way into numbers over the week that today's result ended up being a simple extension of the weekly trend.  The negative blow from the positive data has been dealt and absorbed.  So if we're starting next week fresh from that perspective and we've just concluded one of the many downward spikes in 10yr futures price action, which coincides with the double bottom, even if it's only for a few days, we should get some sort of lift next week.

At such inflection points, things can go either way, it's true, but with the triple bottom in prices, the double dip in the MACD histogram, the oversold sStoch (to answer a previous question on the blog), and the Monday after a Friday Sell-off effect, there are plenty of arguments on the positive.  Don't get me wrong, we could put up some techs that would make negative suggestions as well, and indeed continued losses are just as valid an outcome for next week.  The point is this: approach it with fresh eyes and with as much of the burden of this week's events removed because it is in many ways, as much of a blank slate as we've had in a few months.  Bottom line: Today's NFP print will stand out as one of the Econ Data headlines that--although it confirmed whatever level of recovery we're going to have--was a bigger source of dissension among economic forecasts, a bigger unknown, a bigger shock, and a bigger outlier from trend and expectation than most of the data we'll get this year.  It's behind us and we lost frickin' 3/8ths...  Let's see what next week holds...