it was a mostly uneventful day in the MBS, treasury, and stock markets. I suppose uneventful doesn't quite do justice to the price movements in MBS. Even though it seems like we should have had more ground to make up between Friday's losses and now, I'm proud to announce that we have regained up 100% of price losses from Friday's NFP data. And though this is not quite the case for treasuries and that being the case, necessitates a bit of spread tightening on the part of MBS, in the absence of any meaningful supply or happy to lean on spread tightening if it means prices go higher and rate sheets get better.
In MBS, the 4.0 closed at 99-05 which was up 12 ticks on the day. The 4.5 was up only nine ticks by comparison, closing at 101-26. The lower end of the coupon stack may not be the most interesting story of the day for MBS. With the print of the most recent pre-pay report it was seen that coupons all across the stack are, for lack of a better phrase, simply not pre-paying. That's not to say that the notes are not being retired at all but rather slower than expected prepayment speeds are the order of the day. When that's the case demand for MBS is the general beneficiary and in the current "where's my supply" environment, it's not so hard to see why buyers outnumbered sellers five to one today.
And now for the "uneventful" part... First of all, MBS did not have quite the battle facing them that treasuries had this morning. coming in to today treasuries were only slightly off their high yields from Friday's session coincide with a very important technical boundary at 3.50. MBS on the other hand had already recouped more than a third of their losses by the time the lights went down on Friday night. in addition, once the positivity was underway today an exceedingly narrow and well-behaved trend channel carried prices slowly but surely higher through the close. I'm sure you'll agree that that's the kind of uneventful we can live with.
Despite facing some more austere challenges treasuries were no slouches themselves. The 10 year note rose 13 ticks, bringing the yield down to 3.427. Elsewhere in the curve things were even better especially if you define "elsewhere" as the short end of the curve. Twos shot down in yield eight basis points to 0.762. This brought the twos tens curve wider to 266.5 bps. At that yield level, 2's theoretically have room to run a bit lower, however we're more inclined to chalk the relative weakness is 10's up to the forthcoming week treasury auctions. Whatever the case one makes for the shape of the yield curve on the day, what is clear is that the technical fence on which 10 year notes sat on Friday night did indeed turn out to provide resistance. Whether or not that proves to be the case throughout the week is somewhat uncertain today due to be exceedingly low-volume. Additionally, nothing that happened today could have any more significant effect on treasury yields than the upcoming auctions.
You can see in the chart above that treasuries appeared to very regular trend channels over the past two days, and then encountered firm technical resistance at the 3.42 to level mentioned this morning by AQ. all this is ongoing evidence that the market continues to range trade between technical levels. It's the same story in stocks as 1110 has proven to be a seemingly impenetrable ceiling. At no time in the multi-month rally have we seen stocks so stymied by a certain price. however, it's not quite as glorious of a range holding as MBS would like to see. reason being: there is equally firm support not far underneath the resistance. When this happens technical analysts refer to the shape in the chart below as either a pennant or a "flag". When this pennant or flag pattern follows an extended rally its normally taken as a sign of a continuance of the rally, however a given that these are the highest levels of the year and even some stock market bulls point out that we may be entering a correction, one also shouldn't rule out the possibility that this is a sign of indecision as opposed to a consolidation before shooting higher.
Tomorrow's calendar picks up a bit, but only in as much as there's a three year auction at the standard 1 p.m. time. this will be the best candidate for market mover tomorrow, but likely won't compare in potency to the rest of the week. Whatever the case, and despite the low volume, we are pleased to see the broader range holds so true, and for MBS to regain all of their Friday losses by the end of Monday's trading. As always we'll give you a play-by-play tomorrow as potentially volatile price movements follow the three yr auction.