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Granted, this is not quite the "higher high" uptrend labelled with the dotted line from the previous post (which we though would be hard pressed to hold anyway), but the directionality is the same. Factoring out a bit of noise during the brief sell-off, we caught support from a slightly less aggressive "higher low" trend that began with the tsy auction.
How bout that tsy auction? Despite our generally nonchallant attitude towards the 30 yr bond, it definitely catalyzed the rally. CNBC and others pointed out some drama with the Barclay's MBS index today, but we assure you, this DID NOT "drive the fixed income market" today. We'll get into a more detailed discussion on the index in the future, but for now, the important thing to understand is that the MBS market participants that actually pay attention to the index in order to determine allocations could barely scratch the surface in terms of manipulating price. Those with pockets deep enough to matter have bigger considerations than the index. More evidence of the real catalyst? On the following chart, which shows you the whole week in the 10yr so far, at what time do you think that most recent and sizeable drop in yield occurred?
Here's a hint: it MAY be the exact same time results of the tsy auction were released. Now of course, it's not so much that 30yr bond auction results EXLUSIVELY drove the market, but more that they were a catalyst. From there, one can point to a number of things, even the repeated test of 4.0% on the 10 yr that came BEFORE the auction. Bottom line though, many took the 30 yr results as a "hint" about the true demand for tsy debt and at what yields demand would start to overwhelm the panic. Enough of the market thought today was an early indication we'd reached that point do put the big "flattener" (yields down in long end versus unchanged in short end) on the curve with the 30yr bond up a point, the 10 yr up 22 ticks, while the 2 yr only saw a 2 tick gain.
You can see in the chart that the yield paused again near the technically significant 3.92 level before the auction and chose to dance very closely around this level--never even straying far enough in one direction or another to constitute a definitive violation--until auction results were released. After that 3.92 broke, all losses from the previous 3 days were erased in a matter of minutes as the yield fell to Monday AM's low range at 3.81. Gotta ring the cash register a bit though right? But even the rebound eventually consolidated around tuesday's close at 3.85. Even in after hours trading, we're still at that level and have formed a "flag," which is a technical indicator that suggests potential for further drops in yield after this consolidation. Sadly, this sort of tech is more pertinent on a day over day view, but worth pointing out on intraday charts when it happens if for no other reason than to balance the scales of optimism and pessimism for tomorrow.
Pessimism you say? Try a Friday with sparse scheduled data leading up to another 2 week cycle (announcement then auction) of over $100 bln in tsy supply (2's, 5's, and 7's). Try continuing instances of "less bad" in economic reports. Try the challenge of bucking the trend of "oh crap" (technical term) over the past few weeks. Hitting 4.0% again today in the 10yr tsy and staying under (more or less. I show 4.0058%) is a great "double top," but being only a day apart and being only the first retest of the level, more "tests" may be ahead. And that which tests the yield curve will test MBS as well. Try the Fed buying less that $20 bln in sub 5% MBS for the first time in 7 months. Well, this shouldn't really create pessimism since it's a trailing indicator and dependent on supply to boot. it's just "not cool."
What is cool?
Even market bulls are starting to talk about some equities selling being NEEDED. Ha! So, part of the problem might be part of the solution? That's cool. Little do they know the selling they think will constitute a "correction" in a rally will actually be the beginning of another leg down in the recession! Muah ha ha!!! Oh.. Sorry... Got a bit carried away there... Anyway... At least the bears can HOPE for another leg down (apart from making sure to ask for as many free coffee creamers as possible, tie up the phone lines at your credit card company, and "accidentally" knock over the pickle jar on aisle 7 at the megalomart, all in an attempt to sabotage corporate profits... Muah ha ha?)...
Also cool (at least if you're evil, mu hu ha?) is another record in continuing jobless claims which is doing its part to fuel the above paragraph. After all, how can we recover without jobs? (Indeed! Mu hu ha! But of course, we MBS devotees wish not for pain and suffering, but rather for it's salubrious effect on fixed income prices).
One more cool thing that I thought got underplayed today: No one is screaming at the Fed AND the markets actually "pedalled the bike" (go back to this post and catch the analogy) in the right direction today, taking some pressure off "daddy." Moreover, amid the recent confusion at the Fed's lack of response to rising rates, today was evidence that things CAN actually move in the right direction AND with a slight increase in equities as well! Ok, a bit of a stretch maybe, especially after only one day in the green, but gosh darnit! It happened without the Fed anyway. It NEEDED to if there is ever going to be a tolerable conclusion to this chapter in the book of MBS history.
Lock/Float?
Refer to the last line of my son's favorite book: Hop on Pop. "Ask me tomorrow but not today..." But seriously? It's the same old story... If you got some killer reprices from a lender you're using, apply the Gut-Flop to the shortest term deals and whatever else warrants it. As long as we stay under 4.0% on the 10yr AND spreads continue to be range bound, I'd be OK with riding the overnight risk wagon in order to assess intraday lock/float tomorrow.
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