Although we did see plenty of "back and forth" following the release of the FOMC minutes, the day draws to a close with MBS in better shape. In terms of directionality, trading range, spreads, etc... MBS also behaved exactly as expected. Most of this is discussed in the previous post below. It was basically "more of the same" into the close as tsy's were able to extend the necessary lead that allowed MBS to come back a bit. Every time the initial spike of the rally was approached, sellers stepped in (cashed in, more like it) bringing us back down a little bit. The same went for Tsy's. But each time the bid faded, it was picked back up quicker and quicker. What follows is a decidedly elegant example of these two markets doing their dance and "finding their range." This chart is today's MBS price, as normal, but with a guest appearance by the 10 yr tsy price in red. This should let you see visually a few of the things we have been and will be discussing:
First of all, you can see that almost any time prices are moving dowward, MBS are holding more steady than Tsy's. Likewise, MBS are holding more steady when things take an upswing. This afternoon illustrates this phenomenon quite well as Tsy's traced more of their range upward into the rally than did MBS. To oversimplify, the red line got higher than the green line and stayed that way whereas the green line was on top most of the rest of the day. This chart also shows just how connected MBS are to the yield curve these days with even some miniscule movements being reflected between the two dance partners these days. Finally, we can see what I jokingly refer to as "the intraday moving average of the 4.0 price curve asymptotically approaching a horizontal technical level of 100-07." This is just that old high school math graphing "stuff" that means a line approaches a level closer and closer without crossing it. If we were to drastically fade out the current MBS price curve and just overlay the approximate averages of the trading ranges, you'll the the asymptotic relationship between prices and 100-07:
Yes, I know that's a cool chart... AQ will be proud, since he seems to adventure a bit more with paint.net than I do. But don't get too excited.... It doesn't really "mean" anything beyond things we've already discussed about profit taking levels and range-trading. It's more "just cool" than anything with massive undiscovered quantitative significance.
We'll leave the analysis today with this "mostly charts" culmination, since range-trading and profit taking are much more about the PRICES than the FUNDAMENTALS.
Tomorrow is our most action packed day of the week with Jobless claims the Thursday Data Biggie. Also of moderate significance the Philly Fed Survey, and slightly less, the Leading Indicators. Data though, should only impact us to the extent it causes reactions in tsy's. Beyond that crapshoot, the other thing to start to fear is the Thursday before a half day beginning a long weekend. Participation may start to suffer and positions may get (over)protected. More discussion on that tomorrow...