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Spring of 2009 marked a period of the most stable MBS price movements for 4.5's. Not only was the range about as narrow as it gets, it was also solidly above 101-00. With the economy worsening and with the Fed love affair still in the courtship phase, any threat to MBS seemed so far in the future as to be of little concern. This was truly the golden age of production coupon MBS.
When we closed over 102 yesterday, it was the first time since Spring. Today's rally takes prices higher than any price seen this spring with the exception of the the initial day of the spike in mid March when the Fed announced round 2 for MBS. This was really the check-mate for MBS/Tsy spreads. As you can see in the chart below, MBS held steady while tsy's comparatively plummeted to their lows of the year. Keep in mind that the tsy yields in the following chart are INVERTED so that the lower yields are on top (in order to give a better sense of comparative performance...
The chart really is quite telling... Of course we see tsy's worsen much more quickly in the new year thanks to Fed buying. The starting around April of 2009, notice the red line slope down while the green line trends sideways for 3 months... MBS narrow the gap briefly on black wednesday, but are right back to the "as tight as it's been" spread situation by July. Since July, things have been more connected in spreads, but MBS have continued to impress with their tightening prowess. In fact, today brings us to a recent milestone of tightening with current coupon vs. 10yr spreads at a mere 70 bps.
The price movements on the day have been largely discussed in the last few posts. Revisit as necessary (AQ's Lunch and MG's Afternoon). Mostly as expected, tsy yields encountered resistance as they approached 3.30, although the 10yr DID make it through 3.31 to go out at 3.305. But for the sake of fungibility with the rest of the bond world, if we marked at 3pm and went home for the day, all we'd see would be the perfect bounce at 3.31 and a closing mark of 3.3175. We're splitting hairs now... The point is that range is in play as suggested previously, and despite the stratospheric MBS prices, tsy's merely moved to the limits of their recent range...
The chart above, when taken in conjunction with the volume suggests a few things... The first one might come as somewhat of a surprise... The 5yr auction was actually the most important catalyst of the day. Turn your eyes to the largest volume spike of the afternoon right at 1pm (aka 13:00). Volume spiked several times shortly thereafter in support of the range... But notice what does NOT happen at 2pm... No volume spike... No indication of the FOMC minutes save perhaps for thicker flows. The next noticeable volume spike occurs less than 30 minutes before 3pm.
In case you missed a discussion on it at some point in the past, 3pm is the time at which bond prices/yields are marked for record keeping. And despite the fact that treasuries continue to trade 24 hours a day during the week, it's this 3pm time that NORMALLY acts as the "close" for the tsy market. Now, if some wild headline, or some piece of event risk provides sufficient justification, volume and liquidity can stay relatively high through 445-500 pm, but 3pm is the standard. So keep that in mind as you see where the volume spike occurs...
Any thoughts as to what's going on? Simply put, VOLUME IN THE TSY MARKET ROSE BETWEEN 230 AND 300PM IN RESPONSE TO YIELDS APPROACHING 3.31. Of course that's not the only reason, or the only technical level, but at least in 10yr yields... You can actually see the volume start to decrease (if you have good eyes) as yields turn the corner and head higher into the 3pm marking... What does it all mean Basil?
Austin Powers reference aside... when the volume starts to build as already-known technical yield levels approach, the market is clearly voting for the continuance of the range, at least until the rest of the data shake out this week. MBS, on the other hand, did not have any recently significant levels to moderate their rally. Here's how the home team played today. I'd be looking for support from 102-05 if we manage to hang on to the sugar-high into tomorrow.
Stocks continued to give us exactly what we need in order to sustain such a mature rally in MBS and Tsys: absolutely nothing. Ok, if you want to get technical, the Dow and S&P DID close slightly lower than previously, but only just... One might infer a trend from the higher lows throughout the day that could carry over into tomorrow morning... I'm not sure I do (unless it ends up happening, in which case, you heard it here first!!!)... But seriously... After falling this AM, stocks recovered in a fairly linear trend channel. Whether or not that means anything probably won't be decided until we get tomorrow's data.
And as far as tomorrow goes, keep in mind that it's the last full day this week. Nada on Thursday and a halfie on Friday.
TOMORROW:
- 7am MBA purchase apps
- 830 Durable Goods and Jobless Claims
- 955 Consumer Sentiment
- 10am New home sales (more important than normal due to re-invigorated sentiments on housing problems as well as the outlying sales report from yesterday)
- 1pm 7 year note auction.
Some have called the participation at the 7 yr auction into question owing to the impending holiday, but we heard similar fears about the 2yr auction likely being the best of the 3, and after today, it's pretty safe to say that isn't how the cookie crumbled... So as one man of limited sight said to another... We'll see what we'll see... All I know is that my cash register really starts getting a hair trigger when 4.5's are over 102-00. We've said for almost two weeks now: when you look back on Novemeber 2009, it will stand out as an excellent time to have had a lock bias. So as traders ring the MBS cash register with profit taking on high price levels, maybe we should get out our fisher-price "my first cash regisiters" and do something mimetic.
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