As markets are given some more time to digest and show their hand, the bond bears are doing battle with trade flow considerations we discussed in MBS OPEN and MBS AM. This has been a ridiculously intense battle between the forces of good and evil around the 3.21 level in 10yrs discussed this AM. It's important to know that we've been losing that battle over the last few minutes, and thus reprices for the worse are a threat. But volume is high (very high), and a significant amount of resistance has been seen around these levels. At this point, closing prices will be more informative than intraday post-auction fluctuations. We still would not be surprised to see something near this level make a comeback by day's end. Why?
As you can see, stocks and bonds are BOTH selling after ralling into the auction. Considering traditional curve-flattening behavior and the multi-month highs achieved, this makes the most sense from a profit-taking persepctive. That leaves the door wide open for some sort of correction given the 4.009 stop on today's auction... But the bond market sees it more like: "oh crap, I guess we're moving to 4.0 on the 30yr bond... let's run this thing up to 4.05 and ring the register amidst the panic before giving in to fundamentals..."
Maybe that's the case, or maybe that's just the reality WE ALL want to be living in... But given enough time and stock weakness, current weakness IS NOT NECESSARILY indicative of MORE WEAKNESS TO COME. Maybe that means we get back to 3.21, or maybe it means we bump a bp or two higher, but whatever the case, once the dust settles, a STATUS QUO in terms of the volume at 3.21 (or thereabouts) is more likely than a significant movement away from there. Additionally, we'd expect MBS to outperform the curve into this little selling spree. 101-20 to 101-24 is also known as "bounce country" these days... So sprinkle grains of salt on your eagerness to lock until we go lower than that, IF we go lower than that...
MBS Market Alerts
