The concept of the range trade is not new, and not even something that's especially prevalent now versus other times of economic uncertainty. In short, though people 'make bets,' no one really knows both where interest rates are going and how fast. So we bounce around within the range, until the range is broken... Kinda like a planet in orbit until some force nudges it far enough off course to seek out it's next source of gravity--or simply put: the next technically important price level.
We've used the term PAR-nertia in the past, but that's a bit misleading. It just happened to make for a cooler hyphenated word. The "gravity" of technical price levels is actually more germane. But unlike the planets in our solar system that would have to travel quite a long way before finding their next gravitational hook up, price levels in the bond market bump from level to level with relative frequency.. And just like far away star might intercept a rogue planet and draw it into a gradually tightening orbit, see if the triangles in the 2 day chart below don't seem to be suggesting some sort of "gravitational midpoint."
So, the two planets--MBS prices and tsy yields--broke out of their previous orbits this AM... MBS prices were drawn in by the familiar 101--narrowing the range with each pass--and tsy yields did a similar dance with the lower 3.3's... Both broke out of those improving trends by the end of the day, but whether you chalk that up to the effects of their previous gravitational sugar daddy or more appropriately to the meaninglessness of price movements that come in such low volume and so late in the day is inconsequential... There is really only one important concept to take away from all this...
THE RANGE IS THE RANGE! (Until it's not any more)...
Just like elements of theoretical physics are reflected in quantum physics, so too can we see examples of a larger phenomenon playing out on a smaller scale. Consider the treasury chart above for instance. Yesterday's "gravitational yield level" had prices "honing in" on something closer to 3.38. But along comes some force strong enough to move prices out of the immediate influence of that gravity and on to the next rung on the technical ladder. And though the previous range trade has been defined by levels that are more pertinent in the short term, we're finding ourselves again at some levels with significant importance over the long term.
In short, we've been here before, and generally encountered more RESISTANCE to improvement than SUPPORT for gains from the levels of 100-28 in MBS and 3.27 to 3.308 in Tsys. Bouncing higher in yield/lower in price wouldn't be the end of the world except inasmuch as you fear the uncertainty of "something" causing us to move to break out of our current range. With the lowest extreme of said range being 100-10 in MBS and highest yield of 3.5 in tsy's, we're currently too far away from those to be worried about a major shift in trend for the worse.
But that's like the entire difficulty in developing your personal stance on locking at the moment... Do you lock more as things approach the limits of the range? Or when the range is actually broken? The correct answer usually draws on a little bit of both, and it's merely adjusting HOW MUCH you lock based on certain occurrences. Personally, the farther above 100-10 we are, the more I would consider locking (or if you want to use the yield curve as your basis and assume the default post-fed-exit spread widening, the LOWER we get past a 10yr yield of 3.5). And though I'd be doing my best to cash in on the peaks and valleys over the short term, it's the long term shifts that seem more ominous. But as they say: the range is the range, until it's not...
MBS Market Alerts
