What a day today:

Which combined with yesterday to make it quite a two day period:

Which combined with the rest of the week to make this quite a week (end of day prices starting monday the 23rd):

Again, many indicators were stacked against MBS today, and indeed this week.  As a result, MBS certainly did have a mostly bad week versus treasuries, but as far as raw price, we gained the better part of a quarter of a point!

With all the volatility in the markets, many lenders have not yet coughed up all the nice yield that MBS have gained.  By my count, we are either .375 or .5 improved among several aggressively priced lenders.  There is actually room in the price curve for a .75 improvement.  Based on purely mathematical assumptions, this means it's conceivable that the MBS curve could lose 8/32nds first thing monday morning yet some lenders rate sheets would be unchanged.  There's no guarantee of this behavior, but if it remotely occurred, it would be a strong case for floating into monday.

Now we have a puzzler on our hands according to other forecasting methods as well!  A very important internal report by a leading MBS dealer previously this week pointed to a brief down cycle for MBS.  Insider opinion, so says the Ninja, also seemed weighted towards MBS weakness.  Finally, the technicals on spread indicated the spread would probably extend its gap created through Thursday.  Despite these factors, and even throwing major headline risk into the mix, MBS triumphed.  We knew it could still have been a good day for MBS if stocks fell and the PCE was tame, both true.  But no one predicted that spreads would retrace tighter before reaching a resistance level at the wides. 

So this makes the early part of next week uncertain...  Will spreads make another push for that wide resistance level?  Even if they do, will it matter to raw price if treasuries improve drastically?  And will the negative MBS outlook as predicted by the large firm's report and majority insider opinion still be on the menu?  Now as opposed to a negative week ahead, today's performance at least should peak your curiosity enough to put some chips on the table on monday.  Hopefully if we see the negativity on the horizon, we will get a cue.  Also, keep in mind Abdul's Law of Retracement (even decidedly direction moves in a bull or bear market tend to take "2 steps forward and 1 step back").  Well, maybe Abdul's law said something about 2 steps back and opposites attracting.  Basically folks, what I am saying is that it ain't all gonna be sunshine and lolly pops even if we do improve in general.  There will be a period of time lasting one day to one week where it looks like we're going backwards along the same path upon which we previously came upwards (retracement).  But if you can wait it out, and if stocks stay sour or further head towards 11k in the Dow, the technical factors and economic factors start to favor MBS sooner than later.

Yes it's a risk, and of course predicting movements with certainty is a fools errand.  But the aforementioned indicators do seem to offer more support for floating.  If spreads were historically tighter, this would not be the case.  The only major concern that we are currently aware of is the Dow.  It was surprising, considering stocks' resiliency in recent months that we hit the "Bear" requirement today of 20% down since a closing high, although it became more and more a psychological probability the closer the average got to that magnetic figure throughout the day.  Don't count that resiliency out just yet.  And hey!  If you've been reading this site since late last year, you know the opinions herein tend to err on the bearish side!  That's precisely why it has so irked us to see ominous economic data and headlines be met with stable or even bullish days in stocks.  If any of that fire is still in that belly, a smidgen of hope could make this "dead cat" of a stock market bounce higher than... higher than...., uh, higher than a..... uh.... well, I can't think of a good metaphor, but it would have been really hilarious I can tell you!

At any rate, as you east coast folk read this at 10:30 PM, I'm sure your eager to get back out to the 50% off double shot well drink mortgage broker special, so I'll wrap up.  Bottom line, it's not a temporarily gloomy as some thought yesterday.  But remember, the physics of bonds are similar to the physics in the real world in at least one way: the faster MBS tries to climb, the more it will feel the effects of gravity.  If there are three booster rockets that could get us into orbit, it's a bear market, less inflation, and positive trends in MBS risk.  If any of the opposites show up, that flight may have to be rescheduled.