This'll be a bit shorter than normal as we want you to read the afternoon post if you haven't already. At 2:15 PM we gave you the following chart before any bounce had occurred at either price level and suggested the levels looked good for a "bounce."
Even before then, AQ said this am:
"we'll go out on a limb here and say there is a decent possibility of a post auction rally."
More important than a random good guess is the fact that AQ derived his prediction from the following logic in the post before the auction results were out:
"One has to assume that, based on the results of the previous three auctions (good demand for 20 YR TIPS, crappy demand for saturated 2s market, crappy demand for 5s)...that the fixed income investment community has set itself up for a FLATTENER TRADE. This implies...bets are on for a flatter yield curve ...which is a good thing for "rate sheet influential" MBS"
So how'd that all turn out?
Crystal balls firing on all cylinders today... Yeah it's cocky... It was also one of those rare occasions where we actually muse on the future as opposed to the current moment, and AQ and I had agreed we'd call equal attention to it if we were wrong, because whereas being right and talking about it is cocky, being wrong and talking about it is a "graceful defeat."
To conclude the cockiness, the indication we gave about where prices could go on the upside was given at 1:15 pm:
"Looks like the verdict may already be in... Would you be terribly surprised if I told you this has brought us back EXACTLY in line with the most prominent internal trendline of the week representing higher lows from the beginning of the week and the ceiling levels from this AM? "
This is the same trend channel that prices have kept going back to after the volatile spikes from the auctions have run their course. The picture is worth a thousand words when we zoom out to a weekly view. Sans auctions, this week CONTINUES to be one, long, slow uptrend...
Things go silent tomorrow as far as treasury supply, replaced instead with advance GDP. Everyone seems to care a lot about this, but not only do I not have an opinion on what the reading will be, I don't even care. It's the kind of report that almost always falls in the range of economists' forecasts. On the occassions where it hasn't, since it is simply the "advance" and since it is so broad, it gets analyzed and interpreted to the point that the actual effects on the markets are the same as they would be if it had fallen within the range. In other words, yes, it can move markets, but it's not nearly as important as having this week of auctions behind us, and our prediction for tomorrow would be that a slightly worse than expected GDP won't have the same impact on volume and price action that the slightly better than expected 7yr auction did today. Likewise, although a better than expected reading could cause some retracement in bonds, it's not likely to be catastrophic. This whole week has been one giant finger pointing squarely at PAR-nertia... It would take something very unexpected to pull us too far above or below par tomorrow on the 4.5.
All playfullness aside, AQ and I are more humble about the market than I'd bet any of you would guess, eternally respectful of what we don't know and how much more we've identified to learn on your behalf. But when the day goes this well, no amount of humility is going to prevent us from reaching around for a little pat on the back. What's the point of the self-aggrandizement? Just an opportunity to remind you that you're in good hands. Stay tuned as we'll all have to have a good laugh about this post the next time we drop the ball (fingers crossed.... no GDP whammies no GDP whammies!)
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