Except for a relatively short window of time, today was largely uneventful. Yeah, there were some fairly violent swings but those occurred in a compact time frame just following the auction. The rest of the day's choppitility was bound by the broader range and general up-trending in nature. So if one tunes out the hour or so from 1:20 to 2:20, little else would suggest increased pulses. The chart below shows everything else confined to a moderately narrowing range.
Chalk this up to a fairly unambiguous 10yr note auction failing to create any major initial response. "Initial" is the key word there as ostensible responses eventually arrived beginning with the "hour of drama" at 1:26 give or take. Continuing with the key word theme, "ostensible" is used in the previous sentence because only the initial downward spike was related to the auction whereas the upward spike later in the day accounted for the jury being out on the party-line response to the beige book.
Though the 5 of 12 Fed districts noting signs of improvement supports a fairly upbeat read on the beige book, mitigating factors introduced just enough uncertainty and fear to precipitate a roughly 10 point drop in the S&P and, combined with some other bond-friendly conditions, an brief up-tick in tsy's. But wouldn't you know it... BOTH regressed to somewhere near their previous trading ranges by days end with the 10yr up a mere tick on the day and stocks off only a point or two from the bulk of the day's range centering on the 1034 level. But the range bound inertia for MBS may soon be at an end. Why? In short: "The Squeeze."
If you haven't already begun to ponder to meaning of the first graphs annotations, let's delve... The Squeeze is a story of competing trends. On the top side, the "ominous ceiling," provides well, ominous resistance with the highest highs since BEFORE Black Wednesday. Even on days where intraday levels crested 101-00, we have yet to get over 100-28. Today turned around at 100-26, well within our 3 tick margin of significance when looking at trends. On the downside, we rode an uptrend today that originates with even longer term bullish sentiment going all the way back to--believe it or not--JUNE. Maybe...
The trend going back to June (white line) only gets a "maybe" vote because there are other trends equally worthy of consideration. The orange line shows the most aggressive of those and scored 3 solid appearances as support until a few days ago. Essentially, this was labelled as "overly aggressive" because we're not very likely to jump back over it tomorrow or any time soon and tomorrow would be our last day of "grace period" before officially giving up on that horse.
The inclined yello line MIGHT be a contender, but would require some significant positivity over the next few days. This line also racks up a respectable amount of time as support with an impressive FOUR touches including today. Bringing up the rear, as it were, the horiztonal yellow contends with the white line as the safest bet. Why? First, it's simply the price level that served as the previous ceiling for the entire month of August, and we're inclined to watch previous ceilings as potential new support, especially when they fill both those rolls very appropriately and in a fairly confined time period. More plainly: you can see the 3 approaches underneath the yellow line into the end of August. Then once broken, you can see a good example of that same line acting as support under falling prices. The yellow line is mentioned as "safe" above because it doesn't need to support RISING prices, just a new, more autumnal range. In fact, in a few days, the yellow line will be the safest of all when the white line actually will cross it and thus be more and more aggressive with each new day.
But whether or not we stay on top of the white line, it's significance is not in doubt. Perhaps more than any other line on the chart, it is a significant indicator of "something." Now, if anyone knows what that something might be, please let me know! But seriously folks... In terms of overall trend, the internal trendline connecting BY FAR AND AWAY more highs and lows than any other potential line (read: best representation of general trend direction), is the RED line. But even though we're not likely to break that line to the upside, it would still be nice to find a way to work in its stellar performance to more germane analysis.
Enter the white line... You may have already noted this from the captions on the chart, but the 2 LOWEST LOWS of the entire summer perfectly match the slope of this internal trendline that so beautifully captures the momentum of the summer. The one exception we could take with the white line is the degree to which we chalk up the first "low" to an oversold panic in the MBS market. Considering treasuries didn't experience a similar extent of loss at the time, this is a valid concern. Even so, crossing it would still mean that we'd only be left with horizontal support informed by the immediate past--not as bullish of a mindset to be in...
The impending event that may render all this analysis moot would be Class A settlement which will tax current MBS prices with time-value-of-money, known at the moment to be a roughly 12 tick drop. That's right around the corner on Monday, which is why we said there would have to be a fairly significant amount of positivity for these more aggressive lines to hold. The suggestion is a more careful watch of 100-13, the previous ceiling, and the moving target of the white line, which we will certainly extend for analytical purposes should we find ourselves meaningfully nearby.
For those, like me, interested in factoring out some of the settlement related chopitility in favor of considering the broader rates market at such times of the month, we can turn to treasuries for the "extenuating circumstance" vote. In other words, if MBS prove to be somewhat disobedient with respect to all the trendlines discussed above, movement in treasuries can sometimes cast a vote to ignore those indiscretions and suggest a return to trend once "that time of the month" wears off for MBS. Sadly, all signs point to indecision and/or crossroads as of today's close, not lending themselves much to crystal ballin' the future. This is evident in the "bang bang bang" portion of the previous chart leaving off right on the fence as well as the tsy futures chart below showing an opening price a mere tick above the crossroads price of 116-28 AND a mere tick above the crossroads closing price of 117-00. Oy...
Long story short, hedge ratios should probably be adjusted a bit conservatively given that we continue to operate in a "higher-than-August" range, but they're not necessarily as high as they seem once the obligatory 12 tick drop is subtracted come settlement time. Tentative, defensive, and waiting for the neverending saga of the hunt for guidance and direction to unveil it's next chapter...
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