Posted
We've long lamented, or perhaps merely called attention to, the disconnection of bonds prices from fundamentals such as economic indicators. Too often recently, the data will suggest one direction and the markets make a convincing head fake in that direction only to change course and fade the expectation. And so it came to be that "expectations" shifted from what the data might indicate to what the RANGE might indicate.
Don't get us wrong, the range is still very much in play, as you'll soon see, but despite the down day in MBS, in a way it's nice to see the market at least give the appearance of acting according to fundamentals. Admittedly, our focus this week has been more on the auctions than today's data. But at least for the day, the data lines up with directionality better than the auction. In fact, in both MBS and Tsy's, closing levels were very close to their pre-auction levels...
The majority of the downward price movement today came in the AM following stronger than expected GDP (less positive once dissected) data and "as-expected" jobless claims (positive in a continuing claims sense, at least until you realize that was due to benefit exhaustion). Would it not seem then, that the AM data was the driver? Stronger than expected data forced bonds lower/stocks higher? And an underwhelming auction merely left the market sideways...? But in it's best Wesley voice from the Princess Bride, The Range says: "I know something you don't know!"
Although The Range may or may not be left handed, the counterintuitive argument it presents today at least has to be considered as an equally important driver of today's weakness, if not the MORE important one. The chart above shows the general downtrend began at the highest levels of yesterday. Notice that the first "lower highs" on the top white line occur YESTERDAY. This AM's low point creates a parallel line for "lower lows." So did the market know it's direction before the data?
The tsy chart might help answer that question...
3.48 was the peak of the recent range trade, as well as the resistance we noted in MBS LUNCH...
Of course the more data deviates from expectation, the higher the potential for the range to lose importance, but consider that we ended squarely in the middle of the range implied by yesterday's turning point. The auction was WEAKER than expected, but markets ended exactly at pre-auction levels... It's almost as if prices were seeking something other than a linear response to fundamentals... In other words, the auction said, "OK, get a bit weaker now," but prices replied "no thanks, we're just gonna sneak back inside long term ranges...
The extra "lights" on the chart above are to suggest this is a measured move away from "too rich" areas of MBS price. The 4.5 hasn't shown much interest in being over 101-00. And personally, I find it borderline uncanny that the lower yellow line, which represents the bottom of the moderate downtrend and linking together the two recent prominent lows, originates at the exact point the 4.5 departed the range and terminates exactly at PAR. The range is just trying to get back home!
And according to the 10yr chart above, it is home! And thinking of leaving again! But on the side that's less friendly to rate sheets! So after a brief departure, were still on the edge of the recent range right at 3.5... Even if we breakout, we have some newly edified safety netting at 3.57 thanks to the recent spike there coinciding with late august highs. Moreover, I wouldn't read too much into a break tomorrow if it's in the absence of significant event risk or significant volume.
TOMORROW's CALENDAR:
- MONTH END!
- 830 - Personal Income and Outlays .... Employment Cost Index
- 945 - Chicago PMI
- 955 - Consumer Sentiment
