MBS MORNING: MBS Settling Into The Green Groove

by Matthew Graham

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We'd expect the wake of a much-anticipated NFP print to be volatile...  That assumption isn't really a big leap of faith for most market watchers, and indeed that's what we're seeing.  But as the volatility decreases, we're seeing suggestions of both stability and correction.  Traders are preparing to cash in...  So should you...

Let's discuss the chart for a moment...

Generally, today is a green one for MBS.  I wouldn't even pay much mind to the outlying levels following NFP as those are merely the more violent death throws of the volatility that almost always peaks and begins to wane on the printing of this report. 

101-00 looks reasonably supportive in a technical sense, and of course it always carries the "round number" psychological impact as well.  Even then, it appears our analysis can venture even higher in price before becoming more uncertain, and ultimately bearish.  Here are a couple of the "bottom lines"

• Spreads are tight, have been fairly tight for a while, have gotten tighter into today, are unlikely to stay this tight for long, and are never very likely to stay tight or tighten into rallies.  conclusion: spreads likely unchanged at best into bond weakness and likely wider into rallies
• MBS prices are rich...  not from the relative value perspective offered by spreads, but also in absolute price.  Any time we're looking at 7 ticks or better on a 101 handle, we're within a point of all time highs...  All time highs were experienced early in the year, before the "green shoots' crowd showed up, and before the desuetude of mass-scale uncertainty.  (i know, i know...  I said "green shoots," and my feet already feel the familiar warmth from the fires of buzz-word hell)
• The pace of the gains seems a bit aggressive to us...  Even if it's not, it doesn't seem sustainable. 
• Additionally, the trend that sits on top of the range is offering some information as to the range in which traders are operating into the uptrend.  
• Notwithstanding any MBS specific concerns, tsy's are also exhibiting some similar symptoms.  At 3.49, they'll be at the TOP of the previous long term trend range (one man's ceiling, another man's floor?) as well as a downward sloping internal trend that corresponds to MBS upward sloping version. 

Thus a breakout of that range is more likely to inform at least a return to the bottom of the range, if not below.  Even then, what you'd be likely to see in the rest of the day's charts and analysis would be additional layers of support, first at yesterday's highs, then 101-00,  then 100-28+.  In tsy's , it's more of a moving target, but 3.53+ is an internal downtrend connecting yesterday afternoon's high yields and two subtle hits on the same line this AM around the 10AM hour.  to maintain a positive stance, I'd want some support there.  If yields move higher, we'll start talking about worse scenarios.

Moral of the story, if you have the good prices passed on in rate sheets, it's time to cash in.  Traders probably will regardless...  So perhaps this is not an outright "lock alert," but it's a fairly strong suggestion for all those who have seen the eigtht to a three eighths improvement from yesterday afternoon's sheets...