You know how it is... A patient has a raft of symptoms that they treat with various methods and generally approach from an individual standpoint. But they miss the bigger, more interrelated picture that suggests the various systems can all be discussed within the scope of a broader disease. And so it is with the various market events that have seemingly led to directional movements...
Take a look at today's chart and take note of the selloff from yesterday's suggested price level of 101-00 to 100-15. That's a tick over a full half-point folks... Nothing to shake a stick at and certainly nothing that will go unnoticed in rate sheets...
Indeed, by 10AM, morale among MBS devotees was on par with the Skins locker room on a Monday morning... But the to get back to the title of tonight's commentary, such sell-offs are but one of the symptoms of a bigger problem... Another symptom? Take the massive sell-off in stocks today for example.... I remarked to some colleagues that this was like coming upon an endangered animal in the wilderness: "careful guys... that's the rarely seen 'market reaction connected to fundamentals...' Nobody move as it's easily spooked and might not be seen again for years..."
I had to ask myself how much of a joke was I really making. In our circles, we've been talking as if the data might as well not even come out since no one is trading it anyway. Of course headlines and indicators serve some purpose at the moment, but only to act as the excuse to start the range trade pendulum in motion for the day (or keep it in motion from previous bounces). So because of how firmly everyone seems to believe this right now, I had to ask myself one more question... Is this really the fundamental connection between markets and data making some sort of brief appearance, or was the news that everyone blamed for the stock sell-off--Bove's downgrade of Wells--just another excuse to start the bouncing ball (or pendulum? what works better?) in motion?
You already know where this is going... And I'm sure if you've read us for more than a day or two that you rest easy with the knowledge that you'll be among the first to know if we see established ranges being meaningfully broken. So despite the fact that we spoke to it quite a bit earlier in the day, it bears repeating... ALTHOUGH SOME RECENT PRICE MOVEMENTS, SUCH AS THE FAIRLY HEALTHY SELL-OFF BETWEEN YESTERDAY AFTERNOON AND 10AM THIS MORNING SEEM TO SUGGEST SOME SORT OF UNDERLYING IMPORTANCE, THEY ARE, HAVE BEEN, AND--UNTIL FURTHER NOTICE--WILL BE ALMOST EXCLUSIVELY EXPLAINED BY THE RANGE TRADE.
With that in mind, just how eerily frequent have our various "visits" been with a few technical levels in both treasuries and MBS? Consider some of the more popular recent inclusions such as 100-28 and 100-15 on MBS, as well as the relative center of recent 10yr tsy action: 3.38. (3.32 is included courtesy of it's impressive performance as intraday resistance on the 20th, but is not quite in line with longer term significance)...
To get brutally reductive about the whole thing, the following is all you really need to know: IT'S A RANGE TRADE! THE 10YR HAS BEEN 'ORBITTING' AROUND A MIDPOINT APPROXIMATELY AT 3.4 AND YIELDS HAVE MOVED 10BPS IN EITHER DIRECTION BEFORE ENCOUNTERING RESISTANCE OR SUPPORT. SHOULD THEY MOVE SIGNIFICANTLY OUTSIDE 3.5 OR 3.3, WE COULD THEN SEEK TO RECONNECT THEM WITH WHAT THE FUNDAMENTALS MIGHT OR MIGHT NOT BE INDICATING. THAT MIGHT PAN OUT OR WE MIGHT SIMPLY MOVE TO ANOTHER, LESS FREQUENTED AND LESS STABLE RANGE....
(yes folks, I KNOW that the charts have 3.38 and 3.32 and 3.48 as opposed to the "rounder" numbers used in the above paragraph..) But the goal of all the "emboldened" nonsense was to highlight the thesis of "everything" recently, as simply as possible. Why treasuries? MBS are a creature unto themselves and their ranges must be considered against the backdrop of the current spread environment. In recent weeks, that environment has been stable enough that they have also adhered to the range trade. But if we see the anticipated widening with the Fed's exit, treasuries will the better-behaved metric of tradeflows.
So bring on your Bove downgrades and your PPI's and your NFP's and whatever other manner of headlines or indicators you might... The range trade is strong... And the range remains in position for a seemingly paradoxical "bearish attack" BECAUSE OF THE UNDERLYING UNCERTAINTY; BECAUSE OF THE "DISEASE" THAT IS FAR MORE SIGNIFICANT TO THE BIG PICTURE THAN ANY OF THESE DAY TO DAY "EXCUSES TO MOVE WITHIN THE RANGE" WILL EVER BE...
If you want to read "The Dr's" take on this disease as opposed to the patient's flightly and contradictory reactions to a barage of symptoms, look no further...
MBS Market Alerts
