In light of AQ's most recent post, we'll keep this one short and more focused on charts. If down days get you, well... down, then this is for you. Just some things to remember about universal truths of MBS and things to know about the potential future movements.
- We often discuss the number of "up" days and the likelihood of continued "up" days being mutually exclusive. In other words, the more consecutive gaining sessions, the more likely a correction becomes. Today is a prime example and well within the scope of historical corrections
- Much of the offer in MBS today (selling) can be accounted for by originators. They actually put up over $3billion today vs. only a third of that yesterday. It was also noted that the selling was concentrated in the lower stack. This is the best kind of selling there is! Why? AQ already discussed it, but to recap: because it means the lenders are selling pools of loans to investors in order to get the money to fund the loans they will be closing for YOU in that lower rate range! So originator selling is a much more welcome curve killer than the Fed, money managers, or Asia deciding to reduce their holdings.
- Fed 4.0% MBS purchases accounted for a larger portion of this week's share. Full article here.
- Settlement... At this point, next week will be much more pertinent an indicator than today. So many complicated variables surrounding the settlement process that price action today is not necessarily representative.
- 10yr Techs! 10 yr fought off yesterday's high yield several times and closed below.
- MBS Techs! Read on for a very interesting signal seen in today's charts
The day:
you can see we basically traded in the middle half of yesterday's range, never really dabbling in the other 50% that rests above and below the .75 and .25 marks. That's a very healthy and stable range for a correction. Not only that, but we closed (before the roll anyway) right about mid-range. Pretty decent... Then you can see in teal, yesterday's pre-auction high in the 10yr. Notice we bounced there several times today, including just before the close, and did indeed close just below. Sure that battle may not be over, but it's in our favor at the moment.
Glancing back, for a moment at the top of the chart. The bottom yellow line (.25) marks a support level for MBS. This level was also pointed out by AQ. But how can we reconcile this with the drop since that obviously breaks this support. The search for answers begins by zooming out a little...
I began zooming out in order to find some techs for you at closing price levels. Other than the obvious (IT'S PRETTY CLOSE TO PAR, EH!?), there weren't any. But I did notice the huge internal support at 100-08. Considering the book close is at 3pm, and that I'm willing to throw out some settlement related price fluctuations, we have a couple days to get back above this level. So it was time to zoom out again and see what I found. Upon doing that, my eyes narrowed, chin jutted out in a contemplative smile, and head began to nod at a slight angle with eyebrows raised when I saw the following:
Check out THAT bad boy! 100-07 to 100-10, somewhere in there we have the most significant support for the entirety of 2009's MBS trading. Before the recent dark months, that line was the absolute floor. And before the age of the fed, that line gave us our most severe bounce as we rallied into 2009. The fact that a 7 session tick chart throws up this indicator and the annual chart does is a bit too coincidental to overlook. In fact, it's highly suggestive that, even if there is a bit more drama in the short term, we're "on the right track" as far as fixed income regaining some stability, and the 4.5 coupon trading high enough over par to give way to 4.5 PAR on rate sheets.
Bottom line, after riding the euphoria of days like yesterday, don't let days like today get you down. Now, I'm not saying "it's only improvements in our future," but rather that a correction like today certainly DOES NOT preclude improvements in our future, is a very normal part of such improvements, AND actually has some support from the technical indicators in this and the treasury charts.
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