This week has largely been a story of slightly lower supply, slightly higher volume, and steady strong demand led by the Fed.  The net effect, despite weakness today was a decent positive swing.  Monday opened up right on our long term internal trend at 99-19 after dipping below that the previous Friday.  Closing up shop today at 100-04 leaves us 17 ticks higher, equating to just over half a point in discount/YSP.  Not a bad week.

Graphically now:

The total weakness experienced today on the chart above was a loss of 4 ticks from 100-08 to 100-04.  How very very coincidental considering those two price levels are the "range-bound" upper and lower levels AQ and I were harping on since Wednesday.  It's almost as if the market is, well, RANGE-BOUND!  I'm not sure how one "rings the cash register," but I'm sure a quick glance back at recent previous posts could speak to that.

Today's slight weakness was a normal Friday affair.  Treasuries sufferred step for step out of the gate with an AM stock rally.  But by afternoon, the familiar tune began to play and everyone on the demand side of anything left the building.  The Dow reversed from AM positives sinking a moderate 62 pts to 8269.  10 yr tsy yields backed up robustly to 3.132 from 3.08 this AM.  Interesting here that both the 3.08 and 3.13 yield levels have been discussed at length here in the past as technical price levels (not that we came up with the idea, but rather agreed with it's significance).  That yield up-trickle amounted to a 12 tick loss in price.  By comparison, longer duration MBS, and indeed the entire stack, did very well considering the previously mentioned 4 tick loss on 4.0's.  Here's how it all looked:

That puts a bookend on the bedtime story we read every night that recounts the tale of The Magical MBS That Never Ceased To Tighten.  Remember, when treasury yields rise faster than MBS yields, "spreads" are "tightening."  Tightening is what we keep saying needs to, is, and will continue (to an extent) to happen in order for rates to either remain relatively stable in lieu of suffering treasuries or actually IMPROVE a bit if Treasuries can hold steady.

What now?

Next week is a fairly sparse data-wise with no headline MBS events, no A-List economic reports, and no glaringly clear technical indications.  Some of the buzz in the fixed income community surrounds yet another week of massive treasury supply, as $100+ bln in  2's 5's and 7's are announced Thursday.  To what extent the weakness in treasury's is already baked-in in anticipation of this is unknown, but most think next week holds decent potential for further weakness.

Weakness in tsy's, notwithstanding any MBS specific considerations usually spells weakness for us as well.  We can be more sure of such "usually" positive correlations by mixing in the other MBS considerations.  For instance, this week was relatively light in volume AND funding lines were and will continue to be replenished.  This coincided with a great week from a price standpoint which always has the potential to dump a bunch of supply on TBA screens, thus raising rates a bit.  This can be combatted by increasing lender efficiencies and competition, but don't wait up for that particular prince charming. 

More weakness?  How about the continuous and gradual opportunistic hen-pecking of the higher coupons following slightly slower than expected prepayment speeds?  What did he just say?  Ok, so if a pool of mortgages averaging 6% had an average life (before being paid off due to sale, refi, or loss) of 4 yrs, that's 4 yrs of 6% interest the BUYER (ISAOA) could have enjoyed.  If the government releases an alphabet soup of ostensibly "mortgage positive" legislation AND rates go way lower AND property values continue to inch back towards tolerable, one MIGHT ASSUME that those higher coupons such as that 6% would PAY OFF FASTER as borrower's refi'd them to snag the cool new 4.5's and 4.0 MBS.  That means A SHORTER AMOUNT OF TIME  the buyer (ISAOA) gets to enjoy that nice 6% interest in a market that pays significantly less.  That motivates that buyer to get out of higher coupons and into lower ones.  This usually has a slightly beneficial spin for what AQ refers to as "rate sheet influencial MBS," and thus a slight perception of improved rates can exist because of prepayment data.  To end this tirade, after prepayments on those higher coupons came out SLOWER than the consensus, it has allowed buyers to trickle back into that "up in coupon" market for some more opportunistic hen-pecking (echo in here?) before speeds actually do increase and the hens get slaughtered.  Long story short, this slight temporary penchant for "up in coupon" does not help rate-sheet influencial MBS.

The final piece of pessimism is the following chart which is the day over day chart going back to the beggining of the MBS AGE OF FED:

We don't need to get too far into the technical analysis of this bad boy, but on a purely Rorshach sort of level, what is this chart telling you?  Does it look like the line up to today is at a periodic "low sort of range poised to go higher" or a periodic "High sort of range, poised to go lower?"  I could write a few more paragraphs about the technicals in play suggesting a probably retracement back towards the yellow line, but at the end of the day, you could drop copies of this off with my son's pre-school classmates and ask them to "complete the line" and the predictions would probably be the same.  Yes, anything can happen next week, and probably will, but the available body of evidence is suggesting that yesterday's somewhat stronger than normal thoughts on short term locking was felicitous.  We'll discuss longer term locking if we cross the yellow line, which, quite unlike a yellow brick road, leads to a place where the opposite of wish-granting occurs. 

Whether this turns out to be good crystal-ballin' or not, tune in first thing Monday as we can always get you out the market before catastrophe if you haven't locked yet.  Until then, a safe and happy weekend to MBS devotees one and all.