Earlier today we were tracking two trends.  One was the horizontal resistance from yesterday's and this AM's highs.  The other was the uptrend that supported prices earlier this afternoon.  We guessed the latter would probably not hold up as support unless the rally in tsy's pushed yields lower.  On the upside, we also surmised the horizontal floor was likely to hold due to the strength of th 3.81 yield level in 10 yr tsys.  The end result was a bit of a mixed bag as the horizontal floor did indeed hold up and tsy's did indeed get capped out at 3.81.  The upside surprise was that MBS rallied into the close (V shaped afternoon) nearly making it back to the uptrend.  Short version: a good afternoon and great day.  Take a look:

Entering the late AM and early afternoon, you may notice an almost mechanical regularity to the up and down movements.  Not only was the movement linear in that most highs and lows could be connected to fall on the same trend lines, but the changes in the trading ranges were minimal, smooth, and eerily mathematical.  That's no accident as Friday afternoon's commonly see the employment of computerized trading models.  It won't always pan out like this, but computerized stop losses have often accounted for the expansion of downtrends and uptrends on friday's (widening range we discussed previously).  For example, a computerized model might set a sell point at the current intraday low shortly after prices rally off that low.  If prices returned to the low, the model would sell, taking prices yet lower.  But as prices drift a bit lower, buy triggers are tripped and a rebound ensues.  Prices then rally to a point where the model calls for profits to be taken, and the new profit taking point is pushed a bit higher so that when the first part of the example repeats itself, the range expands on the upside.  To what extent this phenomenon actually correlates to price movements is unknown, but hey...  At least you'll sound cool at your next cocktail party, so why not!

In Tsy's today, 3.81 was a CRITICAL level to break as it was the floor that rapidly falling yields rebounded after yesterday's 30 yr auction.  They never regained that level yesterday.  Yields were pushed lower in the nocturnal trading session when overseas appetites move the market much more than during our waking hours.  It was primarily during this time that the news out of Japan (Finance Minister, apparently sober this time and relatively sweat-free, asserting confidence in US debt and the dollar) had an impact on yields.  That was good enoughto get us down to 3.81 in the early AM at which point we promptly bounced a few bps higher.  This added strength to 3.81 as a floor.  If the fixed income bulls could break it, it would then serve as a strong ceiling from a technical perspective, thus our relative calm even when MBS hit their mid-afternoon lows.  So although the line is not drawn in on the above treasury chart, you should be able to see that although we approached 3.81 twice, it indeed held firm.  After a bit of musical chairs, it left the building a bp lower at 3.80.  This basis was stable enough for MBS--who in and of themselves have similarly robotic movements in terms of spread--to ratchet upward into the afternoon.  Simply put, once fears of cresting 3.81 looked premature, MBS were able to come off their lows and rally a few ticks. 

All in all, this V-shaped afternoon price movement in MBS put the finishing touches on a gigantic V which was the entire week.  The handwriting may not be perfect thanks to a trend-bucking tuesday, but by the end, the 100-21 price level came very close to the 100-29 weekly highs occuring in the first hour of monday's trade.  Take a look:

Some days, 8 ticks (which equates to .25 YSP) might seem like a lot, but considering the week saw a total of 1-20 in movement (about 1.625 in YSP!!!), I'm guessing you're OK with it...  In fact, the beating we took the first 3 days of the week felt so brutal that failure to rally would have seemed like gross injustice, almost like a movie where the bad guy wins...  But alas, our romantic sensibilities prevailed...  Loan officers reported hearing some sort of epic triumphant theme song ring in their ears.  And just like Rocky, MBS had the kind of fight left that can moisten the eyes of even the most hardened cynics... 

Go get 'em MBS.  You're a wreckin' machine!!!!!!!!

Ok ok ok, we haven't even recaptured half of our fall from grace, but the last two days COULD, MAYBE, POSSIBLY mean something.  The markets spoke WITHOUT any capitulation from the Fed.  The question of "how bad will things get if the Fed does nothing more?" was MAYBE answered.  MAYBE, the "how bad" is 4.0% on the 10yr tsy, at least for now...  Combine this with nearly cliche strength in equities, and even the equities and recovery bulls are talking about a retracement and/or correction in recent stock gains.  As alluded to with yesterday's numerous "muah ha ha's," they have their reason for expecting stock market correction, and I have mine.  Heck, even some of the talking heads made sense today saying "what are we thinking?  Rate hikes?  Inflation?  Recovery?  We have NO consumer yet, and can't get any until they get jobs!"  Their point?  If you buy the old adage that the consumer is 70% of GDP or "the economy," then we can't have a meaningful recovery until that camp is upgraded from refugee status.  The 70% piece is inconsequential...  It could be 40% and the story would be the same.

More hope for Change You Can Believe In?  Citi paid the American Taxpayer a return 3 times greater than the S and P would have over the same time period on the "wreckless money printing" that has so many panties in a bunch.  Even more odious firms "only" matched S and P returns.  Not only that, but the buzz is picking up about how the various stock positions of our government could play out when preferred shares are converted to common stock, indicating there may be more returns on the horizon.  Wait...  So you're saying that when we were all so distraught at seeing hated uber-firms get a carte blanche from Spanky Hank (Paulson), that, at the same time, the government made roundabout investments in the same firms that were being disproportionately (some would argue) strengthened?  And now that they are stronger, the taxpayer actually comes out ahead?  But that would mean I might need to reevaluate my chronic regurgitation of someone else's passionate (but perhaps premature?) invectives against this particular component of QE.  Now now now!  Wait a minute!  I'm not saying "It's ALL good..."  Far from it...  Rather, I simply hope this eventuality serves to increase pragmatism and promote my long held notion that this crisis is FAR too complex for any course of action, no matter how unwelcome it may seem, to be myopically dismissed.  More simply, be cool Hunny Bunny.  We'll only be able to even GUESS at what we SHOULD have done in retrospect.  Vehement certainty at this juncture means there's either a 1% chance you're an uncommon genius, or a 99% chance you're an overinformed blatherskite.  Whatever you are, perhaps this at least might moderate the vehemence with which some have viewed recent "money printing" thus being another feather in the cap of the whole "why the hell would anyone be worried about inflation in this decade?" question being raised more and more by the previously silent majority.

Next week also sees a comparative lack of scheduled data and Fed Speak.  Tsy auctions too are merely "announced" and not conducted.  So we'll have a relatively data-light week, and the 101 bln pound tsy supply Gorilla will only be announced but not seen.  All this on the heels of 2 days that some see as the broad market FINALLY conceding an end to its incessant badgering of Gentle Ben and saying, "OK, 4% on a 10 yr is high enough.  We'll take that and be happy with it."  It's kind of shaping up to be a promising week ahead...  At least we can actually conceive of impending positivity.  But it's not for nothing AQ's morning content referenced remaining defensive.  That means it's better to be conservative with YSP than riding the float boat.  If the client and broker are happy with what's on the table, lock it and move on.  Sure, we could have a massive rally, but at the drop of a hat, a headline could come out that changes the whole tenor of the market overnight.  USA's AAA credit rating sound familiar?  And all that took was a few minutes on TV with Bill Gross...  Moral of the story....  This might seem like a standard game of chicken between us and YSP, but that oncoming car you see is really a roadrunner-esque rendering on a brick wall.  The sooner you get your kicks and exit the lane, the more 3 dimensional you should remain.  Eye of the Tiger!