Even in the time that intervened our afternoon post and the close, MBS moved yet higher and tsy's yet lower. But just as we start passing out grains of salt during negative price action at these times of day, so too will we caution you against allowing these late day gains to lull you into a false sense of optimism. Even if there was some decent volume behind the movement, which there wasn't, no meaningful ranges were broken and no market event fueled the move. I wonder if we'll ever snap due to the frustrating repetition associated with constantly observing MBS movements as "range bound, disconnected from fundamentals, and lackluster trading maintains status quo of the trader's paradise..." What else did you expect?
Of course we'd have to rally about as much as possible without ever violating the recent range... Tsy's as well sunk near their recent low yields, though appear to be holding on to more of a "higher low" trend as they've bounced from 3.41 to 3.42 to 3.44 today.
Believe it or not, the story of the day is the much anticipated 2yr note auction. In and of itself, nothing stuck out as better than expected. This would usually not cause the rally we saw, but the fact that the rally occurred in spite of that is evidence of how much concessionary selling had been built into current levels. In other words, the fact that there were no horrible surprises from the auction ended up being a net positive as accounts were more or less "prepared for worse."
Ahead of today's auction, all other data was shrugged off without so much as a courtesy hug. And whereas markets are well-accustomed to shrugging off CBO data such as today's forecast of 2.8% GDP growth, it's less predisposed to do so with Cash Shiller, FHFA, and Consumer Confidence all showing continuing signs of recovery. Even though the CBO is not on trader's speed dial list, they did put out a noteworthy chart today :
source: www.cbo.gov
Before you get too panicked, note that the line above you includes forecasted changes and that those forecasted changes. Even then, a negative 10% deficit as percentage of GDP is not the ridiculous blowout it might seem to be at first glance, especially not when it's caused by QE used to combat what Bloomberg is fond of saying 18 times a day: "The Worst Recession Since The Great Depression." Fed Balance Sheets, spending, unemployement, ALL THAT CRAP has been EXPECTED TO GROW.
That's the nature of this particular form of recession combat. And if stocks and certain reappointments are any indication, fewer and fewer people should be able to malign the recovery efforts, though I know the folks I can never seem to have a logical argument with can always win if they say: "just wait five years!" as they nod their head authoritatively. Problem is, some of those folks have been saying that every year ever since I've known them... But to whatever extent you want to worry, postulate, or plan for a distopian future where gangs of kindergarteners and 4th graders vie for military superiority, that's up to you. I'll leave my pontification in the here and now, thank you very much.
At least one component of that pontification is where I like to remind the inflationista that SOME of our spending has gone to better than AAA investments such as treasuries and MBS. If one focuses too much on the outflow column on the balance sheet, especially without understanding the abstruse nature of some of the inbound cash-flows, yeah.... Things ARE going to look pretty bad. And heck, maybe they will be! But until that's effecting tomorrow's rate sheet in a more meaningful way than the following data..... NEXT!
Tomorrow:
- MBA Applications
- Durable Goods Orders
- New Home Sales
- Fed buy back of 30yr paper (the 2-3 yr version is ostensibly what drove yesterday's positivity)
- Fed's lockhart
- and who could forget your friend and mine (fingers crossed), $39 B's of 5yr notes at 1pm.
Same logic applies now as has applied every time we've either been at the highs of the range or been facing a tsy auction. Treat the closeness of prices to the upper end of the range one of the main components arguing for a loftier hedge ratio (think about locking more). As far as the auction, consider that auctions themselves have been more bond friendly than not, especially versus their "announcements," but also that lenders have to hedge for the volatility, so unless the AM improves markedly, the gains on rate sheets could be minimal ahead of the auction. And do you really want to draw straws with economic indicators in the AM?
Well, maybe you're past your lock cut off, in which case, this wouldn't be making you feel any better. The potential comfort comes from observing today's action. In short, economic data didn't matter. That's not to say it WON'T matter tomorrow, but simply to suggest that once again, a majority of directionality should be derived from the auction. NORMALLY, I'd qualify all of the above by saying that the top of the MBS trading range makes it even more difficult for the auction to lead us higher. And you know what, I'd probably say that today too (but moreso because of tsy ranges and not the 2nd derivative that is MBS prices).
But I would not say it today with the same level of certainty that prices will continue to bounce off this ceiling. Granted, it will have to be a stellar auction to make this happen any time soon, but SOME TIME, if the economic recovery can manage to stagnate or even grab a quick leg down before going back to sunshine and lollipops, there's a chance to push higher in fixed income. And not only is this not a pie in the sky chance, but if it happens, it could be soon (not "minutes and days" soon, but "weeks or months"). Why?
Forgetting the additional pages required to go into the fundamentals that might or might not support such a freakish occurrence, just take a look at the chart... Last time we crossed the 100 day moving average, we didn't go back. This isn't a hard and fast rule, but what has proven to be a better than average assumption is for prices to not move significantly downward after meaningfully crossing this line to the upside or signifcantly upward when crossing to the downside. In other words, there are plenty of times throughout history where prices have simply danced around the 100 day moving average, but when it crosses after holding on either side for an extended period of time (months), either a sideways sloshiness or an extended period of time on the other side of the line have been FAR more common.
You decide... Are we getting ready to cross?
Does the hourly chart over the past few days make it any easier for you?
117-11+ occured with HIGH volume several times making it a good candidate for a floor. But if we test that tomorrow, forget better rates. 117-26+ looks like the actual upside of the market today considering that was the most frequent ceiling, and the overrun occurred in the last 3 hours of the session AND on low volume. So that looks like the trader's sandbox to me considering there's probably a stick note on a good portion of JV desk screens with an update from the caribbean saying: "117-31+ is your limit for today!"
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