Posted
Yes, I write a lot... I'm working on it, OK!? But read every last word of this one...
Once a year, I like to have a passionate revelation... Last year, it was the development of a massive triangle of competing trends that I felt were destined to signal the inception of "something really good" for mortgage rates and spreads. There was nothing especially groundbreaking about thinking that "something's gotta give" in reference to MBS into the Fall of 2008. Spreads were over 300bps--all time wides, and continuing to blow out week after week. To make matters worse, relief was so far out of sight that even the Frannie conservatorship failed to remedy the slide.
You were either in one camp or another. On one side of the argument foretold the end of days for the mortgage world; an inevitable crash course that would see the stricken masses roaming distopian streets with wheel-burrows full of gold bars, water, and toilet paper to use to buy their next house... The rest of us knew (or thought we knew!) that SOMEONE or SOMETHING MUST come to the aid of the MBS market lest the real post-apocalyptic reality ensue... We got our wish with the announcement of the Fed MBS purchase which broke the back of the epic triangle's bearish line, and have never looked back.
But as the year draws to a close and as we test MBS's loftiest price aspirations of all time, the BIG picture is rapidly coming into focus... At least it is for ME... Once again, there will be different "camps" that might have different opinions on the matter... And once again, the camp where I hang my hat is in no way sparsely populated. In other words, I didn't pioneer the idea I'm about to share, just this iteration of its delivery. Here it is...
Spend some quality one on one time with the chart if you like. Draw your own conclusions. Or ponder the conclusions you think I might share. Do it quick though, because here they are... (but not en masse as I think the chart tells the majority of the story).
All good things must come to an end, and for the most part, MBS in 2009 have been a good thing. From a VALUE perspective, they've been a great thing: constantly appreciating and lacking the more dramatic volatility of their benchmarks (usually)... And though IT'S VERY IMPORTANT YOU UNDERSTAND I'M NOT SAYING WHEN OR HOW PRECIPITOUSLY THIS GOOD THING WILL END, IT WILL, NECESSARILY END.
I think the fact that MBS current coupons don't stay under 4.5 forever is not some groundbreaking shocker for most of us... We're all riding the wave while the ridin's good (someone tell the AMC's!). And like me, you've probably pondered "how it'll all end" to a much greater extent than IF it'll all end. And though there's plenty of chance and uncertainty as to how it'll all go down, I got the same gut feeling about the above chart that I got from the triangle that led up to November 2008.
In short...
To me, the "recovery forces" trendline has now proven to be overhead resistance on several salient occasions. We find ourselves rapidly nearing it again (hence the motivation for this post), and whether or not it actually holds concrete-firm, the more important component of my revelation is that it "feels" like an appropriately sloped suggestion of the gradual and volatile path of the rate market's return to something a bit more historically average (eventually!). And as I so often point out, trendlines say MORE about the market in RETROSPECT. In other words, I don't rule out the possibility of breaking that trendline... Merely that such an occurrence would seem "significant" to me.
The "crisis" trendline draws its primary support from the 2008 summer lows. Then, following black Wednesday, it was this same slope that informed MBS's return to the higher prices of 2009. Taking of my professional and analytical hat for a moment... Even with no experience or track record on the mortgage market, it seems to be extremely significant that this trend was the only saving grace for one of the most catastrophic sell-off's in MBS history.
That's a perfect example of a trendline being more informative in RETROSPECT. If you're merely looking at the consecutive low points in Aug 08 and late Oct 08, it would be almost foolish to think that this had a high liklihood of being a meaningful and prolonged trend into 2009. BUT with the June bounce and the parellel juxtaposition of lows in August 09 and, what?! late October 09 (go figure), the trend not only held significance INTO 09, but THROUGH it...
To come full circle on the "retrospect" discussion, it will be when (not if) this trend is broken that it become most significant. In other words, it's mere existence is no guarantee of prices' continuation, just as the bearishly sloped line is no guarantee we can't go higher. But when it's broken (and not just "here and there," but by a significant amount and for a significant amount of time... remember, we're dealing with very long term and very broad trends, so we need to be careful about drawing inferences from insufficiently convincing data), THEN it will mean "something."
"Something" might be some sort of turning point that will eventually lead us back to the confluence of a more stable economy and necessarily higher interest rates, all the while meeting resistance at the "recovery" line. Or it could be a brief but more precipitous decline... Whatever the case, just as many of us KNEW in our hearts that MBS were set to improve into a weakening economy with a yet-to-be-determined form of support, I'm pointing out the obvious again this year. But common sense notwithstanding, it felt important enough to share that I see these currents as the first meaningful suggestion of how the numbers will adhere to the broader conflict between the forces of recovery and the flight to quality.
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Nothing else to write today... It's late, and that was long. And I realize you may be shaking, or crying, (or laughing? whatever your take, this is a community and not a dictatorship, so let's be DISCUSSING in the comments over the weekend and on Monday). So here are the rest of the charts I had prepared for today specifically and in some cases a one liner on each... Have a great weekend....
Price movements in MBS and tsy's for the week... MBS still looks like the beginning of something "parabolic," which would coincide with an epic bounce off the above mentioned epic recovery trend...
But considering the next chart, anything's possible. Here's the week in stocks, looking as reluctant as ever to join the 1100 point club.... Maybe something parabolic here as well? And if stock prices and MBS prices look set to decline together, it either casts doubt on one of the two predictions (if you believe in the stock lever), or suggests an uncertain week ahead.
A zoom out to a long term view showing the as-yet unbroken 1100 point mark and the curves departure from it's previous wave cycle of linearly parabolic "higher highs" (it looks like the path of a ball bouncing up hill).
ACTION PACKED MONDAY ON TAP! (for a monday)
- Retail Sales at 8:30
- Empire State Survey at 8:30
- Business Inventories at 10 (mbs commentary expected to show exhaustion of intellectual capital)
- Short Term Bill Auction Announcements
- Bernanke at NOON
Secondary Marketing Managers and Capital Markets Desks, if you are interested in subscribing to the same fixed income and mortgage market data we use:
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