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Volatility Increases As Markets Continue Digesting Cliff News
Posted to: Micro News
Tuesday, December 18, 2012 10:04 AM

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Any report on trading levels this morning must be clearly qualified as a mere frozen moment in time. Reason being, it's been a choppy morning for MBS, with several breaks back and forth across 'unchanged' levels.' As of this very moment, Fannie 3.0s are perfectly unchanged at 104-14, which is a long term pivot point of relatively high importance, having been the pre-QE3 price high for MBS back in late July (not to mention the rarely tested post QE3 low and area of firm support yesterday and Thursday).

As for the broader bond-market picture, things have been mostly weaker and exceedingly volatile with respect to the narrower ranges that prevailed through most of November and early December. Yesterday's sell-off marked a shift toward a more defensive stance for bond markets, in large part due to a shift in the tone on Fiscal Cliff news.

This shifty tone continued late yesterday and again this morning as the two sides continue taking baby steps toward the center of the ping-pong table, continually volleying incrementally more conciliatory shots toward each other. Before yesterday, the shots seemed designed to crush the opponent, whereas they now look like "gimme's" designed to allow for an easier return volley.

Risk markets liked that a lot yesterday, especially after the close, when Obama responded with his own plan after Boehner's weekend floater. Naturally, these floated proposals aren't intended to garner stamps of approval, but rather to serve as the aforementioned gentle ping-pong shots that help both players come closer to the center. Markets see the teamwork. Stocks like. Bonds don't.

10yr yields hit 1.794 overnight, but got a bit of relief in the European session, falling to 1.761. Yields rose again as domestic accounts filed in, but didn't make it past overnight highs by 8am. Minutes later, stock futures and bond yields bounced near their overnight ceilings and headed lower. Stock led the way with S&P futures down nearly 10 points since then. Treasuries are much more hesitant, only ebbing to 1.777 currently

Morning economic data? What's that? All the flows are centered on one of two things: either on Cliff headlines themselves, or the other bigger tradeflows. We've had both the Trade Deficit and NAHB Housing Market Index this morning with no reaction on either front.

Stay tuned for Cliff, though this afternoon's 5yr Auction may be worth tuning in for as well. For now, keeping a hopeful eye on 10yr support at 1.79 and MBS within 2 ticks of 104-13.




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