Most recent alert from MBS Live:

MBS Underperforming Treasuries, but Fed Buying Change That 11:53AM

Perhaps the most striking thing about markets today is the lack of anything striking. Things are quite dull. Headlines are in short supply. Economic data is non-existent. And the world is left to trade the unwinding of a Friday equities rally that perhaps wouldn't have been quite so bullish without the "risk goggles" on. Sure! It seemed like a great idea to bid up equities and European markets on the Italian voting over the weekend, but not so much on this Monday that essentially constitutes "the morning after." 

That unwinding process has been generally more favorable to Treasuries than to MBS with the former making progressive gains and the latter still trading in a sideways range. Chalk this underperformance up primarily to increased volatility/hesitation ahead of more specific HARP 2.0 details tomorrow, but expect some opportunistic Fed buying when/if things widen out too much. 

The gains that follow would be the first hints at potential price improvements on the day, but we'd expect that like traders, lenders would also be a bit hesitant ahead of tomorrow's hotly anticipated announcement.

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While we can only surmise the sudden uptick in MBS was due to the aforementioned opportunistic Fed buying, it seems like the most likely candidate given the timing of the move relative to MBS and their newfound willingness to mimic Treasuries' bullish movements

Certainly, this is a welcome bounce back from the weakness that was suggested by Friday's action in equities and Treasury futures, but MBS are contending with some tough resistance overhead as well as a dire need to hold some critical support below.  In the following chart, the red line is the critical support line and the 101-26, the most important resistance.  For now, MBS have been trending lower in a channel marked by the teal and yellow lines, but seriously need to hold their ground here in order to avoid a broader shift in rate sheet offerings.

Relative performance vs Treasuries will play some role in whether or not MBS can hold that ground, but the broader market biases regarding RISK will likely make the ultimate determination.  To that end, we can observe 10yr yields safely trading within recent ranges.  Breaking the lines immediately above or below the most recent trading in the following chart would likely result in similar breaks for MBS (since TSY chart is in yield, a break below the 1.98 level would likely coincide with MBS getting back safely above 101-26 and a break above 2.15 would be a nail in MBS's coffin.

Stock markets are in somewhat of a contradictory pose, seeming to suggest that they see support for a more and more bullish stance into the end of the year.  But there are countercurrents from lower highs in stock prices recently, leaving us with a triangle of converging trends. 

Although the minute to minute movements of stocks and Treasuries have been well connected in terms of the "stock lever" the actual yield and price levels haven't been matching up perfectly in any given moment in time versus another.  So it's hard to say that a breakout of the stock triangle would also suggest a breakout of the range in Treasuries, but at least we can assume it will be easier for Treasuries to hold under their supportive ceiling at 2.15 if stocks don't break higher out of the triangle in the chart above.