Q: Is the MBS market doing good or bad today?
A: Yes
At the very least, you can draw on familiarity as a positive for today. Despite the significantly higher price range, the narrow and stable trading range hearkens back to so many summer days where major surprises could be taken out of the equation. And as mentioned in AQ's most recent commentary, sideways sliding is likely to persist until tomorrow's NFP data. For what it might be worth, we're slightly higher than the middle of the range this afternoon.
Recall that the entirety of summer trading took place with the 4.5 coupon below 101-00. We managed to break that trend yesterday but find ourselves failing to confirm today. Additionally, as far as "day over day" prices are concerned, we have yet to break the summer time range. In last night's close, we suggested that both tsy's and MBS stand at the bring of significant and highly informative resistance. Though there are a few hours left to go, it seems that the decision on the re-test of those important levels will give it's first right of refusal to tomorrow's data.
The white circles when both MBS and Tsy's have "tested" this intense resistance. No clear breaks... If you also consider that the last 3 years have seen similar gains in the month of August with a turning point in early September marking 6 weeks of either losses or range-trading, it should begin to perk up your concerns about yesterday's rally extending past 101-00. Maybe it will, but the odds are against it from a technical standpoint.
But to whatever extent we might be fearing, nay, even planning for a moderate correction before any continuance of the rally, there is also a mitigating consideration for bond prices. Unfortunately, anything that benefits bonds prices at the moment is likely to have more salubrious effects for tsy's than for mortgages as lowering rates to quickly poses large enough problems for lenders that they are not likely to keep pace with the bond market into major rallies. That said, a healthy bond market at least isn't going to hurt rates. And here's the counterpoint to the cautionary tale a few paragraphs up.
What do you notice about the following chart?
On both the top and bottom sections the blue line is the S&P and the yellow line is 10yr futures. What I wanted you to notice about the top chart is that futures prices in tsys and stock indexes tend to mirror each other. You're probably already familiar with that GENERAL phenomenon of the tug-o-war between stocks and bonds. The top section of the chart is a much longer time frame and I think does a good job of showing the general truth behind the "mirror image" assertion.
Then we move to the lower section of the chart which only goes as far back as july and see a different story. At the far left of the chart a level of 118 in tsy's informs a 900 level in stocks. But over the past few days, with tsy's the same or better, as opposed to acting the "mirror image" role and hanging out around 900, stocks are about 100 points higher. Granted, there is plenty of "uncertainty money" that's been able to reenter the market on both sides of the risk-o-meter. But I know you've heard plenty of pundits saying stocks are overbought, or the rally is exhausted, or whatever. With the S and P capped out fairly hard around 1000 over the past two days, and with an apparent pressure vacuum to be filled between their prices and tsy's, it makes an argument for optimism that is at least worthy of mention.
All that to say, the next move should normally be some retracement in bonds, but the potentially overbought stocks moving into selling mode might provide enough support to buck the historical trend. And we'll know significantly more about that tomorrow morning. Knowing that it could go either way (including sideways), that history suggests to lock it all up now, and that the dark horse suggests more gains are available, plan accordingly for tomorrow. But whatever you do, you cannot dismiss the previous range as it has a bearing on origination pipelines for weeks to come. Knowing that this creates some overhead resistance on the primary rate market, event the most optimistic of us should probably be lock weighted until NFP gives more guidance.
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