100-28 has perhaps been the most frequently discussed horiztonal technical price level. As most of you recall from previous discussions on technical analysis, if a certain price level has withstood numerous "re-tests" (prices approach and even touch the horiztonal line, but don't break through) as a resistance (think ceiling), once that resistance is finally broken, it's new tendency is to act as support (think "floor"). This has very much been the case as can be noted in last night's closing post when prices fell from their recent highs, only bouncing at 100-28. But... (uh oh... there's the "but...")
If you didn't click through, here's the chart from last night's close:
Looking at the MBS portion of the chart, we see a lot more evidence for 100-28 as a ceiling than as a floor... And with prices closing UNDER 100-28 at 100-26, that was actually edified last night. So it's a bit of a slippery slope operating ABOVE 100-28 at the moment, at least if we're expecting it to hold. The only way it would have sufficient edification as support would be if we saw similar technical signs from related markets such as tsy's and/or tsy futures. So do we?
If we were just looking at lines without any knowledge of the securities that underlie them, the bounce off 3.31 in tsy's should coincide more properly with the highs of the day in MBS. So why does that bounce suggest a move lower from 100-28 in MBS...? In a word, "widening..." Yesterday's low yields began to approach 3.38 as MBS bounced off 100-28. So if we're so we're lower than 3.38 at the moment AND if yesterday's spread levels were holding, MBS would be be OVER 100-28 when tsy's are under 3.38. The fact that this is NOT the case is tangentially related to yesterday's spread widening.
Again this morning, spreads widened into the bond rally (which they normally do). In a nutshell, tsy's are outperforming MBS, so we have to depart from yesterday's correlations and pick up wherever "things line up" on today's charts. If MBS are at 100-28 at the moment AND tsy yield are moving HIGHER off a major technical level, the widening spread suggests that MBS don't have much "catching up" to do. In other words, if all things were equal, current tsy levels suggest slightly higher prices than we're seeing now. But because tsy's have been outperforming, we can't assume 100-28 is too weak compared to tsy's. THUS, ANY CONTINUED INCREASE IN TSY YIELDS WOULD LIKELY COINCIDE WITH MORE PRICE LOSSES IN MBS.
The only salvation for MBS is the potential for tsy's to correct with a move lower in yield as they reach the first "noisy" part of today's trade denoted by the teal line. This is the the yield level to which prices IMMEDIATELY moved after AM data. So until proven otherwise, this establishes the high yield on the day at about 3.35. There's a decent chance that tsy's bounced there (or somewhere close to it, hence the "zone" terminology). If that happens, it's immediate support for MBS to hold onto 100-28 as a floor because MBS will very likely have been tightening if we approach 3.35 in tsy's. In this scenario, the 2 day widening would have simply served to align 100-28 with 3.35 in tsy's as opposed to 3.38 yesterday. Same price in MBS, lower yield in tsy's.... Unless something funky is happening with prepay speeds, that's a surefire indication of spread widening.
So a bit of "wait and see mode" as the PM hours approach... I'd wager that the mini rebound in stocks after 10AM is not helping. Conversely, if they turn around before reaching today's peaks around 1096, that might be all the invitation tsy's need to get that bounce. 3.31 might be tough to break today, but if we stay below 3.35, MBS should be operating above 100-28 in Fannie 4.5's. Stay tuned...
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