The day closed out remarkably well considering the data this AM, it's immediate effects, and the conclusions that could have easily been drawn after combining the two. Most notably, a strong retail sales report is exactly what we DIDN'T need. And indeed following that release, it looked as though all might be lost for MBS and pals. But whether it was the surprise failure of stocks to take off at the open, a weak inventories report, or the good Dr. Ben's warning about the recovery not feeling like a recovery, the 10AM hour saw prices tick back up to yesterday's closing levels. From there it was the customary amount of chopitility, but lo and behold MBS managed to close out a mere tick under yeserday's close. It could have been a lot worse...
Opinions were mixed as to stock's slow response to seemingly bullish data. Some pointed to disappointing earnings from Best Buy and Kroger while others called attention to the fleeting impact of Cash For Clunkers on retails sales as well as the diffuse effect of higher energy prices even to areas of the report that claim to "exclude" such things. In other words, the street wanted more if faces were to be melted. Nonetheless, here we are at yet another recent high for stocks and yet another range-bound vacuum of future indication for bonds.
Realistically, the conclusions might have drawn from yesterday in MBS shouldn't have changed all the much today from a closing price perspective (seeing as how we're only a tick off). Word from the Ninja's street is that Fed buying looks to be remaining strong at about $5 bln per day. This more than offset nominal origator selling somewhere just north of $2 bln. The incremental love for MBS was evident in the incremental tightening of spreads. Particularly, 5's outperformed current coupon 4.5's while 4.0's actually gave up a bp or two of spread today depending on who you ask. As Fed buying continues to favor 5's, what's the next move whether it be THEIR next move, or the move of WHOEVER is doing the heavy lifting when Fed MBS purchase days are over? If UIC gets too rich and stocks want even just a bull market correction, let alone a "W" shaped recovery, seems like a "down in coupon" play might be on the horizon.
Maybe not today, maybe not tomorrow, maybe not soon, maybe not ever, but the ingredients exist to whip up that tasty little dish should the kitchen staff choose to give it a try. But that's a distant enough eventuality that we can drop it for now and instead ask, if MBS ended at yesterday's levels and remains subject to the same "crossroads" conclusions offerred yesterday, can we turn at all to tsy's for any additional hints? In a word: no. Even though tsy's did experience more negative movement today than MBS (hence the spread tightening), no clear technical signals were given. This is first evident looking at the charts above and noticing that yields would first need to break intraday levels at 3.465 or 3.425 in the short term and 3.5 or 3.3 in the longer term. But at a closing level of 3.445, they did neither. Even turning to 10yr futures shows "close but no cigar" flirtation with technical resistance.
Just like the yellow line on the MBS chart shows a previous ceiling acting as current support, so too does the red line accomplish this for the 10yr contract. A meaningful move below 116-26 would be fairly alarming in futures and would also lend credence to some of the other technical indicators that are, for now, adequately refutable. With the bottom line being that we're in the same position technically as we were yesterday, dare we look at market fundamentals? Today's open market operations for the Fed were far enough out in the yield curve to be a benefit to our recovery today. But not so on the next round of buying. Additionally, some extra buy-side love was felt as a few yet-to-be-determined corporate bond deals were finally priced today. In fact, a "few" is a radical understatement. We'll save the particulars of rate-lock hedging for another time, but the suggestion from both of these is the existence of a bit of artificial strength for bonds today. Combine that with MBS spreads that already outperformed the curve in addition to more uncertainty from another action packed day of econ data tomorrow leading into quad witching on Friday and risks rapidly make a case for outweighing rewards. Given that prices didn't rise early or steady enough for you to get much access to yesterday's rates though, it's hard to know whether current levels justify upping the lock bias or are casting yet another vote for "wait and see."