The week began quiet and without guidance as markets waited for much-needed clues to come from Bernanke in his semiannual report to congress on Tuesday and Wednesday. So the status quo can be seen on the charts below as represented by monday's action. The blantantly obvious "Bernanke Effect" will show up mid week with Thursday and Friday noticeably marking a time period in which "Bernanke isn't talking any more." Sure, there were a raft of earnings releases and data events said to be driving markets in the second half of the week. And for all I know, they could actually have impacted fixed income. But to me, it's a much easier explanation for a Friday night to simply post the following chart...
Of course it wasn't really that simple, but fixed income certainly behaved that way as both the 10yr and MBS fell back to a point where the ENTIRE friday session's range fell WITHIN Monday's range. Study the following chart...
The technical trading in the MBS chart this week is uncanny... Notice on Thursday's sell off that prices moved straight down until encountering resistance precisely at a range created by pre-bernanke highs. After that first "probe" lower was successful, the next stop was 99-09 which was not only a "shelf" reached on Monday afternoon and Tuesday morning (pre-bernanke), but also a retracement level of recent discussion. This was enough to stave off further selling for MBS, which left the 4.5 closing right at levels that marked the most aggressive part of Monday. All a bit too coincidental...
You can see in the tsy chart that after yields fell below 3.66 on Monday, that was a ceiling that remained quite firm through Thursday afternoon. We can even see what LOOKED like the beggining of a peak leading up to noon on the 23rd. But as 3.66 was broken, technical trading patterns would suggest a more rapid acceleration until the next resistance was found. And what was the resistance? Why not go with the highs of the week? Though a bit bigger of a retracement than MBS, these were enough to turn (or at least stem) the tide of tsy selling. And to ice this week's technical cake, we end smack dab on that critical technical line at 3.66.
It's almost as if the market checked in for the week, trashed our house, cleaned up by Friday and took off... An ostensible status quo for the markets but more trauma than most originators likely wanted in their house of YSP... It's a trader's world...
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Narrow Focus On Today Only
Should be obvious by now, but it was a snoozer. Just a quick chart for a closer look and then we'll move on.
Looking Ahead
Back to the future where Marty encounters and old enemy that even 17 flux capacitors may not save him from: Treasury Supply. 3 possibilities here:
- The historical norm: MBS gets hurt
- The historical anomaly (yet supported by last round's auctions): MBS get happy
- The poke in the eye with a stick that is neither sharp nor blunt: sideways slidin'
Given the situation this week where a higher than par 4.5 on the heels of a longer than normal and relatively stable streak of gains, leaning towards locking on Wednesday night was well justified. And this upcoming week, though the upside might not be quite as drastic, there are some potential retracements to be made assuming data plays ball as it has recently. This means we'd need continued "middle of the road" suggestions from the most important data sets. A modicum of positivity wouldn't even preclude a decent week for us. But most importantly, the recently good/great demand would need to show up at next week's tsy auctions. This gave us a major boost 2 weeks ago and is in a position to do so again.
So if you find yourself floating over the weekend, here are bullet pointed triggers that I'd be concerned with...
- LEI on Monday morning tends to have a decent correlation with GDP, so is a moderately important report. If it's off the charts, the safety button on your lock lever should be disabled and you should be ready to take a pull.
- At 1pm, stay tuned for a meager $6bln TIPS auction which may (though not likely) give traders and indication of demand for the rest of the week
- 99-09 would be the first warning sign. Much below that and short termers are feeling very locky
- Same sort of breakage happens on the 99-00 level and even the long termers may get kicked off the float boat
- But breaking out over the 50% retracement at 99-19 and holding it raises a distinct possibility of getting back around PAR in short order.
If all that happens before the auctions run their course, these triggers will be adjusted. But until then, if I didn't make the decision (where available) to lock tonight, I'd certainly be a floaty boat passenger unless prices hit 99-09. As far as signals from the 10yr, I wouldn't want that old girl to break 3.71 lest I get on my lockin' boots. But to make everything really simple, barring headline shockers, EVERYONE is waiting for auction results. So just make sure you tune in next week to get instant market reaction and MBS implications right here. Until then, let's hope we don't see the reappearance of ephemeral market moving specters that only show up for a few days to get our hopes up...
MG and AQ Out!
MBS Market Alerts
