Another day of gains come and gone leaves us even better off than previous sessions.
In fact, with prices hovering nearly a half point over par in 4.5's, these are the best levels since 7/31/09 which closed a scant 5 ticks higher at 100-20. Before then, you'd have to go all the way back to July 10th to see higher prices. But what's the risk that current trading is merely another iteration of the high side of the summer range bind? Or that once Class A settlement hits in a few weeks that the resulting price drop will leave us in the exact same range? Unknowns aside, we do know that today's gains are by no mean a definitive break of the trend, especially when viewed in the context of the following chart.
In essence, this shows that the most recent stages of the range-trading in MBS and Tsy's can not only be looked at as pertaining to horizontal price levels, but also as falling within narrowing and slightly improving trading ranges. As we discussed last week with respect to "triangles," such trading action can almost always be found depending on where one wants to look. So we insert the competing lines above not so much to examine their existence as "triangles," but rather to illustrate that prices haven't deviated meaningfully from the successive highs or lows of the recent range. Read that sentence again. And rather than be suggestive of future direction it speaks more to volatility. Since there is no clear trend in the data, the suggestion--rather than "continuance or reversal"--is of the POTENTIAL of prices to move either direction.
Given that prices could still be seen to be "well-behaved" in the context of the trend-lines above (as opposed to purely horizontal price levels), things for us don't change much I'm afraid. Same old story of floating being riskier when we trade near the highs of the recent range. Expand the range to include something more than just August and even horizontal price levels still provide sufficiently ominous overhead resistance.
All that to say: when you go through days like today that end up producing intraday price charts like the following, don't get lulled into a false sense of security. The risk of loss has not been made any better by what can largely be attributed to "range-bound flow-driven trading ahead of NFP, another MBS settlement, and what some might even call the beginning of the end of summer. Things are about to get serious. Directionality is about to get a chance to mean something again. Falling in September as opposed to one of those other sunnier months, this Friday's NFP has the potential to give us our first dose of autymnal reality. Bottom lines are these:
- don't discount the previously profitable principles we've been applying to the range just because we're out of it in a horizontal sense. We're still very much in it if we apply a justifiable trendline to higher highs, or simply go back a bit further into the summer in search of horizontal price points.
- don't lose any of the defensive edge you've been carrying recently as today's trading is only ostensible cause for that. The colors are not yet bold enough, nor the artists numerous enough for any significant amount of writing to be on the wall.
- nothing happened today even though it seemed like it did.
(to be fair, something TRIED to happen today when Liesman interviewed NY Fed President Dudley this AM. Despite the concept of the Fed's exit from MBS purchasing playing a significant role in the conversation, MBS spreads didn't budge and actually improved. This is yet another suggestion of the bond market's widespread dislocation from what would historically be important--yet more reason to keep the top two bullet points above near and dear in coming days and weeks.
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