Wednesday crushed many hopes and dreams. Veritable tomes have already been written discussing the particulars of Black Wednesday. Fortunately for your Friday night time commitments, it doesn't take as long to discuss the positivity. A big reason is the thousand or so words (most of them are "yay!") that the following chart is worth. Here's today's action:
And here's where most recently updated MBS prices can always be found:
So what gives? In short, after the veritable "run on the MBS Bank" on Wednesday, several motivations emerged to take the other side of that argument.
- To some extent, fixed income was oversold, and in particular MBS over-cheapened relative to benchmarks. Opportunistic buying ensues from one and all.
- 7 yr auction didn't implode the world
- More analysts out saying it's premature to consider change in US credit rating.
- Seller exhaustion - some definite "purging" going on.
- Bernanke weilds double edged sword saying there's no set target for tsy's, but covering himself with the cliche "act as needed" type of verbiage.
- Despite up day in stocks, whispers of doubt on the wind that "Recovery 2009" might not have the legs some think.
- "Month End" Approacheth
Due to some of the above reasons, and possibly one or two of their own, many firms recommended buying MBS yesterday and that sentiment persisted this AM. Some firms today recommended a quick profit grab but it had little if any effect on the massive momentum established (snowball back up the hill?). If we look closely, we might see some profit taking enter the scene at the significant technical level of 100-20. It could just as easily be attrition among traders--battle weary after 2 days of record volume in the bond market followed by a face melter on Friday--packing up the carbon fiber golf clubs for some lightning-safe golf (bad east coast weather). Despite the profit-taking recommendation, the same firm (BoA/ML) said they DO NOT recommend shorting MBS or shorting MBS vs. Tsy's as they wouldn't be surprised if 4.5's settle back into their recent range of 101-00 to 102-08.
The even better part about today is how much it "told" us.
- MBS is not a sick patient: spreads came right back down today and followed the yield curve. The magnitude and timeliness of the rally surpassed expectations.
- There is a "too cheap not to buy" point for tsy's and MBS.
- Tsy Demand is the "little engine that could" in the face of uber supply.
- We saw some shockingly predictable technical movements around some epic price levels like "modal lows" and key retracement levels.
- MBS may act of it's own accord briefly, but the wheel is given right back to tsy's.
Knowing these 5 items, you are actually allowed to go into next week with some optimism. It's a data and event-rich potential MBS paradise with some of the more "real" economic indicators bookended by NFP on Friday. And where there's NFP, there's that "traditionally supportive week" for MBS. In addition to Class A Settlement and the expected-to-be-favorable prepays and paydowns, we're graced by Ben Himself twice next week and not just at commencement speeches and rotary luncheons at the senior center. There's also the slightly more tolerable treasury announcement expected around $64 bln in new issuance.
Of their own accord, it's very unlikely to see innate weakness in MBS. We're all about tsy's in the beginning of the week, shifting to a mix of yield curve following combined with flow considerations for the end of the week. But since we're mostly tsy focused early in the week, and seeing abnormally light downward "counterattacks" today, floating into next week makes good sense, at least for the deals you are willing to float based on your own personal GUT-FLOP. Wednesday told one story, but yesterday and today are saying "more potential upside ahead than downside for MBS." (insert normal "tape bomb" caveat here). And remember, you can chase the MBS Dragon, but you can never catch him.
"Come Get Me!"
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