It was a choppy day indeed on this last day of 2009.  As per usual this week, much of that choppiness can be chalked up to much lower than normal volume.  MBS and Tsy's tanked early with the 4.5 down all the way to 99-14 and the 10yr actually cracking the 3.9 mark.    But by the earlier-than-normal end of trade, both had recovered to levels slightly better than their weakest recent closes.  That puts the 4.5 at 99-27, down only 3 ticks on the day and the 10yr note up 4.3 bps to 3.835.  Previous support had been 3.85.

Over the past two weeks, we've tried hard to impress upon you the degree to which this end of year trading may be completely meaningless as far as what lies ahead in 2010.  The holiday season makes it tough also.  It plays a much larger role than you might think in affecting volume and the extent to which current movements suggest true sentiment. 

To make matters even more confusing as far as the crystal ball, there has been limited to no evidence in terms of economic data, events, news, earnings, etc... to justify the movement in bonds.  If you chalk up the movement to ANYTHING OTHER THAN year-end idiosyncrasies, low volume, or absent staff, you then have to take the leap on board some of the broader and farther reaching topics we've discussed such as an underlying shift in sentiment about the recovery. 

Data has neither been overly optimistic or pessimistic, and it wouldn't get as much attention this time of the year anyway.  So as we've seen all too often in the past, an environment unencumbered by convincing data or other guidance tends to be an ideal breeding ground for PERCEPTION-BASED assumptions about what's happening or might happen.  Fear and panic can take hold.  Some might even cite hard numbers as cause for their crack-pot theories.  Ok ok ok... We know they might not actually turn out to be crackpot theories, but I would kindly ask everyone in the camps shouting "INFLATION!" or "HUGE, FAST, ACCELERATING RECOVERY!" to do a much much much better job of presenting tangible evidence for their case and to filter out as much emotion as possible.

And so it is that these last few weeks of trading in bonds have resembled the one other time this year where similar fear and panic took hold....  Similar too, is the fact that both periods of intense losses preceded a time period known to mark a shift in the markets.  Earlier, it was the characteristically weak summer doldrums, and now it's year end.  Granted, we're one step closer to the end of stimulus and the onset of recovery, but the range should tell you we still don't know when and how exactly that recovery will take shape. 

Additionally, we've often noted the "forward looking" nature of bonds.  So in times where speculation and sentiment shift can be thought to fuel at least part of a market movement, it makes sense to look at the equities side to see if they too are finding reason to make such a massive position shift.  But a quick look at where we've come since breaking out of the insanely long and narrow year-end range-bind in stocks is enough to tell us that the vote from stocks is not nearly as "out of bounds" as that from bonds.

The original yellow uptrend is in serious jeopardy of being completely forgotten.  The more conservative white trend-line has held up as stock gains decelerated.  But the most significant component of the chart above would be that the breakout of the tight year-end range seems insignificant given the drop-off in volume and lack of year end participation.  So, to a much greater extent than bonds, stocks tell the story of "sideways and waiting for guidance," albeit with a minor distortion to the upside.  For more of a sense that nothing definitive has SHIFTED, an even longer term chart is telling.  Regardless of the gains thus far, and regardless of whether or not your eye sees the reduction of trend intensity, stocks still face an ominous "band" of historic levels before they could be considered to be trading even at the worst pre-crisis levels.

Heck...  It makes good sense that after the initial holding on for dear life of late 08 and spring 09, that month after month where further catastrophe is absent that stocks would ratchet notch by notch, higher and higher.  But the point is that they've done so all the while playing by the rules of FUTURE UNCERTAINTY YET TO BE RESOLVED.  The chart tells us nothing in the sense that we'd logically expect such a shape in the absence of accelerating catastrophe.  With most indicators ostensibly bottomed out, it's only natural for stocks' own picture of fear and panic to slowly but surely be unwound.

So to revisit both the short term message of recent weeks and longer term message about 2010, DON'T TAKE LATE DECEMBER TRADING AS INDICATIVE OF THE FUTURE.  It may turn out to be dead on with where things land once participation, volume, data, and news pick up in the new year, but until those shoes (or knives?) drop, there's no way to be sure.  With that in mind, the final dose of perspective is a follow-up to the 3.2 to 3.85 range in bonds.  To the same extent one can broaden their view to consider "bonds still playing by the rules, but just barely," so too could we STILL look back on December's weakness as within the scope of broader trends, even if it truly is "just barely."

Folks...  We're NOT saying rates won't go higher.  They may indeed.  They may not even come back down as far as we'd like or at all.  The only conclusion you should draw here is that ALTHOUGH rates HAVE gone higher (much higher) in December, it DOES NOT suggest the fundamental shift in sentiment and bonds is over and done with.  Furthermore, there has been little, if any evidence to suggest it even SHOULD be over or done with YET.  That's not to say that 2010 will be another 2009 because it won't.

I think AQ put it at a less than 1% chance that we'd see any meaningful double dip recession and experience any more prolonged periods of 4.5% with a bit of rebate.  But the possibility of experiencing a long enough of a period of SOMETHING with a 4% handle paying rebate is very much open for debate.  Opposing arguments will begin to be heard next week.  Until then, thanks for a great 2009, and Happy New Year.