Last Week

- MBS sold off Mon-Thu, then bounced after Friday's Jobs Report

- Bounce was paradoxical on stronger Jobs.  Lots of potential reasons

- Bond markets were defensively prepared for strong NFP

- Friday was the high point of a week that was decidedly negative

This Week

- MBS Roll on Monday night, meaning a flat day erases most NFP gains

- Treasury Auction begin on Tuesday, maybe these were cause for some hesitation after NFP?

- Data is limited in general but Retail Sales on Thursday

- Biding time until FOMC Announcement on Dec 18th

Strategy

Last week was certainly interesting due to Friday's post-NFP movement in MBS.  After the stronger headline came out (203k payrolls vs 180k forecast), bond markets immediately sold off to their weakest levels in nearly three months.  But the weakness ran out of steam in roughly 6 minutes and trading levels had returned to pre-data marks within half an hour.

For the rest of the day, MBS stuck it to Treasuries and were ultimately able to gain more than 3/8ths of a point while Treasuries held flat.  To be fair to Treasuries, holding flat is quite an accomplishment in the face of a stronger jobs report.  What gives? 

While we discussed this quite a bit last week, the gist was that bond markets had been on the ropes for the entire week and then some, and that the ropes were simply too stretched to allow for much more weakness (or for those who prefer Gorilla-based analogies...).  As such, Treasuries were able to end the day roughly unchanged.  So what's up with MBS being able to do even better than that?

Last week, we only discussed this in terms of the recent push and pull between MBS and Treasuries, whereby the former had been consistently walloped by the latter in the past two weeks.  While a fair amount of MBS's Friday outperformance could be accounted for by that sort of corrective bounce, there are two fundamentals to consider this week as well.

The first of those is the monthly MBS settlement cycle with today being Class A Notification.  This is the day on which sellers notify buyers of the details of the pools that are about to be settled.  Buyers heretofore only knew they'd be getting a certain amount of mortgages that met a certain criteria, and today the generically traded pools will be filled by actual mortgages.  Once that happens, December MBS coupons will no longer be tradable (because any loans that could have filled those coupons were just assigned into coupons that have already been purchased!).

This means that the next most current MBS coupon (January, in this case) will take over as the representative for "MBS Prices."   January coupons have always been trading lower in price than December coupons.  So when price screens make the switch, it will look like prices are falling.  Keep in mind, prices of January MBS aren't falling.  We're simply switching from following December to January. 

Fairly regularly, MBS prices grow progressively inelastic surrounding settlement.  Sometimes if if sellers are scrambling to buy up more inventory to deliver, prices can get squeezed higher, regardless of what's going on around them.  Although we had several other ways to account for Friday MBS resilience, perhaps this is another.

While MBS were squeezed higher, Treasuries looked repressed.  First of all, this could merely reflect the days trading momentum and MBS could have just been THAT much stronger.  More likely though, Treasuries were holding back just a bit due to the impending round of supply this week.  In other words, there are Treasury auctions on Tue, Wed, and Thur.  Dealers bid on these auctions and it's not uncommon to see less aggressive buying in the days and hours leading up to the hour where they know they'll potentially be buying an awful lot.  Think of this like waiting for a sale to stock up.

Beyond those bond-market-specific housekeeping items, the only significant data point of the week is Retail Sales on Thursday.  Even then, with FOMC looming one week after that, bond markets are more likely start getting in position for that, as opposed to trade a big reaction to Retail Sales.