What a turn around today for MBS! 

After being down as low as 100-30, MBS moved to close the day over half a point higher at 101-16!  This is definite "striking distance" territory as far as all time high ranges are concerned which had their best weekly close at 102-07 and daily close at 102-18...   The fact that the 10yr was closer to 2% than to 3% the last time that occurred should give you an idea of just how much the spreads between MBS and tsys have tightened. 

Performances weren't all that disconnected today if a few bps of tightening doesn't excite you.  The 10yr had a decent day, dropping to 3.442 in yield.  But MBS performed even better...  The FN 4.0 ended the day +0-11 at 98-29 yielding 4.115% and the FN 4.5 went out the door +0-12 at 101-16 yielding 4.317%. The secondary market current coupon is 4.206%.  That's good for a spread of 76bps from the 10yr to the current coupon!  The tightening CONTINUES to lure us in to some sort of acceptance of it's longevity.  But as we have said and will continue to say, such phenomena only last so long... 

The meaningful "drama" for today centered on the 30yr auction results.  We got a very convincing headfake just following the release, but the entirety of the global trading community must have heard AQ say he expects a recovery....  Because shortly thereafter, it was off to the races all across bond-land...

The tsy component of the chart above shows that the last few gyrations of the day were very much in line with the morning directionality... One of the several reasons we were entertaining a rebound had to do with stock market behavior following the auction...  S&P (blue line above) had actually crested it's extremely important 1100 level yesterday on "who gives a damn" levels of volume.  So after that was thrown out with the bathwater this AM, any movement with volume promised to be informative...

The first clue to the potential rebound came when stocks moved DOWN after the auction, further away from that 1100 mark...  We all give those immediate minutes after an auction a little grain of salt in the sense that they are not always indicative of movement for the rest of the day.  So Tsys waited for stocks to do something...  As the S&P moved from 1095 to 1092, tsy yields plummeted in lock-step.  Stocks' anemic attempt to regain that lost ground saw tsy's chopping around a fairly tight range for a bit, but as it became clear that no significant momentum would build in stocks, tsy's put the big hurt on their equity brethren.  When the dust settled, we'd seen nearly a 10bp screamer from peak to trough...

You might also note (and probably expect) that volume spiked appreciably after the auction and stayed generally higher through the end of the day.  It was good for the highest reading of the week, and with the exception of NFP, two weeks!  We discussed the possibility of some sort of potential energy building up with the vacation and juxtaposed low-volume days.  4 out of the last 6 days fall nicely in a trend of rapidly decreasing volume.  Knowing that the 30yr auction was on tap, and that it was a day after Veteran's Day, and that the market greatly desired information about the shape of the yield curve, it seemed fairly logical that we'd get a pop.  See said "pop" in the volume portion of the chart below:

Each red tree in the forest chart is one day's volume tally.  We hit right around a million contracts today, verus 700k+ on tuesday and less than 600k on monday.  The volume spike is important because we were counting on that to confirm the importance of either a bounce or breakout of the neckline of the 'inverted head and shoulders" technical pattern that emerged in late october...  Depending on which of the necklines wins your vote for most significant, the implications can be different.  Although less than today, tuesday's volume did constitute a meaningful increase over monday's, and with that day marking the breakout of the lower neckline, the read would probably be positive.

But today is a bit of a different story...  Though we did break out of the neckline yesterday, not only have we already established that didn't count, but by close today, we were mere fractions of pennies under the line.  Considering the fact that today's volume trumps Tuesday's, and that it's a more appropriate conclusion to the significant data events of the week, I'd be more inclined to ascribe the significance to today's movements.  But one can either draw attention to the fact that PRICES closed under the trend or one could look at the approach from yesterday and call it a bounce.  Once again, don't be tempted to assign any importance to yesterday...

More important is that prices were UNDER the trend this AM.  This makes it seem more like resistance in that context.  If you sprinkle in some candlestick voodoo, we're looking at the "hanging man" formation which can indicate a reversal if the "ceiling" holds tomorrow...  Here's the same chart, same lines, but drawn in candlesticks...  

The concept behind the hanging man (the right-most candlestick) is that during a rally, if a candlestick emerges with a long lower shadow and a small real body, it signals waning upside momentum in the rally.  If the hanging man is confirmed by lower prices tomorrow, it would then be much more significant than today, but it's at least something that should have you on high alert tomorrow if you're floating anything overnight.  And for certain quadrants of your gut-flop, may be enough to lock a few in before confirmation even has a chance to ruin your day...

Playing 2nd fiddle to the auction today was Treasury's release of their monthly budget.  Here are some bullets:

• -        October is the first month of the Fiscal year for our government
• -        Deficit for the month is a massive $176.4billion
• -        Deficit for October of last year, $155.5billion
• -        Receipts down 18%
• -        Outlays up 6%

As far as market movers tomorrow, it's neither sparse nor action packed.

• International Trade at 830
• Import and Export Prices at 830
• Consumer Sentiment at 955
• And Fed speak from Evans at 1030...