With treasury auctions, testing of long term ranges, stock rallies, and stock sell off's, it was quite a choppy week. (long time no chopatility, eh?). The story of the day was the weak stock market. We discussed it earlier, but I'll put the chart up for you again which shows the index breaking its longest term support a few days ago, bouncing off the next support level down, returning exactly to the long term support with yesterday's rally, only to break through yesterday's support today. Ouch... Tongue twister there... The last 4 salient lows in the S&P are denoted by the white circles. Long term primary trend in grey. shorter term, but even more established is the secondary trend in red. So if we just call the long term trend "grey" and the shorter term "red," we could take the tongue twister to the next level and rewrite a few sections of Dr. Suess book. Heck, we could even change the title to Shocks In Stocks: Grey brakes wednesday red holds next day grey holds same day red breaks next day Yes... I'm reaching for it at this point, so let's get on with the recap and call it a week... (maybe it's because Fox in Sox is one of my kid's favorite books... sometimes I hear it in my head...) Ahem... MBS did well the 4.5 MBS rallying 13 ticks to 101-06. This was good for a current coupon at last marking today of 4.266, the lowest point of the week. But dropping even more in yield today than the MBS current coupon was the 10yr

You may already be aware of the notion that stocks tend to be weaker when the currency in which they're denominated is stronger. You may even already have seen CNBC or Bloomberg put up a chart like the one we're about to show you. But for anyone else, here's a visual representation of just how strong the negative correlation is between stock prices and the value of the dollar. These two curves might look like a mirror image of the same security, but the green line is in fact the dollar index, and the red line, the S&P. So as one goes up, the other tends to go down. We're visiting this topic as strength or even exhaustion of weakness in the dollar is stoking fears among investors that stocks are due for a correction. Whether the dollar buzz is partially or even mostly at fault, the S&P is not in good shape, nor are other indexes. Day before last, we bounced off a long term trend in the S&P and were looking for support to come into play yesterday. It did (unfortunately for MBS, and stocks rallied all the way back to the trend that was broken the previous day. Now today, back down not only to the previously supportive trend, but THROUGH IT, as can be seen in the chart... All of the stock weakness is benefiting bonds, especially tsy's. The 10yr is up 22ticks at 3.411. 4.5 MBS are up 9 ticks (underperforming it's wings with 4.0 up 12 and 5.0 up 11) to 101-02. I don't know any cool jargon terms for 101-02, but you may have seen or continue to

Econ Data Releases INCOME AND OUTLAYS PERSONAL SPENDING -0.5 PCT (CONSENSUS -0.5) VS AUG +1.4 PCT (PREV +1.3) PERSONAL INCOME UNCH (CONS UNCH) VS AUG +0.1 PCT (PREV +0.2) CORE PCE PRICE INDEX +0.1 PCT (+0.1247; CONS +0.2) VS AUG +0.1 PCT (PREV +0.1) OVERALL PCE PRICE INDEX +0.1 PCT (+0.1186) VS AUG +0.3 PCT (PREV +0.3) YEAR-OVER-YEAR PCE PRICE INDEX -0.5 PCT (AUG -0.5 PCT), CORE +1.3 PCT (AUG +1.3 PCT) REAL CONSUMER SPENDING -0.6 PCT VS AUG +1.0 PCT (PREV +0.9) PERSONAL SAVING RATE 3.3 PCT VS AUG 2.8 PCT MKT-BASED PCE PRICE INDEX +0.1 PCT (AUG +0.4 PCT), CORE +0.1 PCT (AUG +0.1 PCT) MKT-BASED YR-OVER-YR PCE PRICE INDEX -0.5 PCT, CORE +1.6 PCT EMPLOYMENT COST INDEX +0.4 PCT (CONSENSUS +0.4 PCT) VS Q2 +0.4 PCT (PREV +0.4 PCT) WAGES/SALARIES +0.4 PCT VS Q2 +0.4 PCT (PREV +0.4 PCT) BENEFIT COSTS +0.4 PCT VS Q2 +0.3 PCT (PREV +0.3 PCT) YEAR-OVER-YEAR EMPLOYMENT COSTS +1.5 PCT, LOWEST ON RECORD YEAR-OVER-YEAR WAGES/SALARIES +1.5 PCT, LOWEST ON RECORD YEAR-OVER-YEAR BENEFIT COSTS +1.6, LOWEST ON RECORD ISM/NY CURRENT BUSINESS CONDITIONS INDEX FALLS TO 60.8 IN OCT FROM SEPT'S 72.9 NEW YORK CITY BUSINESS CONDITIONS INDEX RISES TO 377.9 IN OCT FROM 372.5 IN SEPT 6-MONTH OUTLOOK INDEX FALLS TO 68.9 IN OCT FROM 69.5 IN SEPT As you can see on the chart, even before the data was released this AM, we'd seen some improvements. In tsy's, these came even more readily than MBS with the 10yr up 14 ticks to MBS's 7 tick gain. This puts the 10yr at 3.443, and the Fannie 4.5 at 101-00

Of course there's plenty of time left in the day, but generally not much of that time is actively traded or especially volatile. And though we did see a 2 tick drop appear out of thin air after the Fed released their MBS purchasing activity for last week (more on this later), it has since been recovered. So is it too early to assume that we're seeing YET ANOTHER narrowing range that hones in on technical price levels? You decide... It might not be as clear what the MBS triangle is suggesting, but basically, these are both "status quo" points on the long term charts, 3.5 on the 10yr and 100-28+ on MBS. If history is any indication, these levels may be broken before the close. But even if tsy's were to end at say, 3.48 and MBS at 101-01, the message would be more or less the same: prices return to just inside the long term range. "Status quo, but ready to weaken if provoked!" I heard something about biggest rally in stocks since July... We'll undoubtedly be showing that big bounce off the technical levels mentioned in last night's close. Considering the fervor of the rally, for bonds to stay in the range say something like: "we might have weakened a bit on the day, but we're not ready to give up on the uncertainty yet..." Indeed most other historical epochs would have seen something worse than the mere 7 tick loss at which we currently stand. MBS current coupon is at 4.3295. Spreads to 10yr at 83.395 bps

Not a good reaction so far to the 7 yr auction... 3.141 with 46% at high 2.65 BTC primary dealers take 11.48 with indirects taking 18.37 Always plenty of volatility after auctions, but reprices for the worse are a risk with the initial move, and they would be coming quickly... more to follow...

The bond market's reaction to 830AM data was not originator friendly. Cash market TSY yields are higher. The 10yr TSY note is trading -0-15 at 101-10 yielding 3.464%. Mortgages reacted poorly too, but not as bad as TSYs. MBS prices have already bounced from the post data knee jerk lows. After going down 13 ticks to 98-09, the FN 4.0 is currently -0-08 at 98-14 yielding 4.162%. The FN 4.5 fell as far as 100-24 before reversing course, the FN 4.5 is currently -0-06 at 101-00 yielding 4.379%. The secondary market current coupon is 4.303%.

After another treasury auction that failed to phase the fixed income market, it's simply business as usual, with no major suggestion of directionality until tomorrow's auction. Exactly as discussed this AM, a "ho-hum" auction wasn't likely to accelerate the rally or squash it, but rather to vote for it's relatively linear continuation into the tomorrow's auction. The only way to cast the rally in a negative light (well, maybe not THE only way) would be to call attention to the widening range between the boundaries of the uptrend... But given the "waiting for shoes to drop" mentality that saw the range narrow before Tuesday's auction, it's not surprising to see a bit of a wider spread between the high and low limits at any given moment in time. However you slice it, the movements have been highly technical. (we're going to revisit the parallel range from this AM in the Closing Commentary tonight, and how it informed profit taking...) Tsy's, of course are a beneficiary of the rally and the flavor of the morning was a flatter yield curve, that has since dialed back into the afternoon, but imrpoved prices in the long end nonetheless with the 10yr up 12 ticks. That's good a for a drop in yield to 3.405. MBS are up 13 ticks to 101-04... Perhaps more interesting than these relatively linear rallies is the technical saga playing out in the S&P. Even as I was applying these lines to the chart below, a similar chart came up

The FN 4.0 is +0-10 at 98-15 yielding 4.159% while the FN 4.5 is trading 7/32nds higher at a bid of 100-30 yielding 4.387%. The secondary market current coupon is 4.33%. The FN 4.5 yield is currently 97.6 basis point higher than the 10yr TSY yield, wider from this morning's level...again it is normal for "rate sheet influential" MBS coupon yield spreads to lag their benchmarks into a rates rally. As anticipated, some lenders have begun to Reprice for the Better as the FN 4.5 crosses over 101-00