Yesterday

- Bond markets sold off at the outset on stronger ADP Employment Data

- 10's went sideways and MBS kept selling until 930am

- Sellers were exhausted by then, and weaker ISM data at 10am helped pave over the floor in prices

- MBS were then sideways to slightly stronger for the rest of the day

- Rates made new recent highs, though a a few lenders offered token reprices late

- Fannie 4.0 MBS Coupons pretty much voted 3.5s off the island.

Today

- Not quite as much data as yesterday and not quite so important

- GDP and Jobless Claims team up to give 8:30am the biggest potential for movement

- Factory Orders hits at 10am, but it's not typically a big market mover

- If data cooperates, bond markets just want to move quietly forward to tomorrow's jobs report

Strategy

NFP (nonfarm payrolls, the chief component of Friday's Employment Situation Report) is the most important piece of economic data on any given month.  As such, it serves as a focal point for tradeflows.  It's like the most heavily populated city on the map with the largest and most complex roads and air routes leading in and out.  If it looks like there might be a party at NFP City, traffic flows with momentum into town.  If it looks like there's going to be giant gorilla attack, traffic frantically tries to get out of town. 

At some point, you find yourself in your car or running along the side of the road and you're not really sure why you're running away from the city or where you're going, you just know that a giant mass of panicked people are heading in a certain direction, and you're going wherever they're going. 

Wednesday afternoon would be the time where you stopped to ask "why are we running?"  After everyone starts talking about it, the pace slows, and the crowd waits to find out if the gorilla is real or if it's safe to start heading back into town.  To be clear, "panic" in this analogy doesn't mean there is "panic" in financial markets, but the level of "determination" is fairly similar.

Traders don't want to be offsides for NFP.  If the crowd is running out of town, it's MUCH easier to run back into town with them in the case of a false alarm than it is to have remained in town, alone, with a giant gorilla.  It's all about which of the two bad calls on your part is easier to counteract. 

So here we are on the outskirts of town, waiting to find out if the gorilla is real.  Today's data will have its say as to whether or not the danger is real.  We're far enough away that we don't have to run too much farther away from town, if at all, but don't expect anyone in this crowd of refugees to quickly run back into town until Friday morning.

Charts

This chart KIND OF shows the "refugees" from the analogy above bunching up on the edge of town.

We're moving to 4.0 coupons today, but not because they just became the most relevant coupon.  They've been more relevant to rate sheets than 3.5s for several weeks, but 3.5s have been relevant enough to be a factor in negative reprice risk.  3.5s have also been more volatile, so it has made more sense to stick with them as the preferred indicator of potential reprice risk.  Yesterday's losses go far enough to push 3.5s out of the realm of mainstream rate sheets.