The title about covers it actually... In fact, if you don't see another post today, this might even be the "MBS CLOSE: Nothing Matters Until Wednesday"
The AM looked ugly, but now...
We call attention to the previous yield levels on the 10 yr as they are two of the rungs on the technical analysis ladder derived from secret voodoo type stuff. Whatever the case, we mentioned 3.82 the other day, AND as I'm so fond of telling you, a ceiling DOES NOT give any sort of prediction as to whether or not it will hold, but rather, when it is broken, significance can be inferred. In the case of this AM, when 3.82 was broken coming down, the suggestion was for the next test to be at the 3.77-3.78 level. So far it's been like a veritable parody of the B-52's with the 10yr's backup signers singing: "BANG BANG BANG, On That Floor Baby!"
But does it mean anything? Nope, not really... Wait, Matt... Why are you talking about the 10 year again? Well... Print this page, and fold the bottom towards the top along the line that separates the two charts... As Stewie said when he ended up getting a great deal on a baseball and bat: "What did we learn?" (hint: MBS tied to tsy's) THAT'S why we're doing techs on the 10 yr at the moment. And the conclusion? Just as we thought! It doesn't mean anything... In the case of the chart above, it basically leaves us right AT a technical level just after a day where it looked like we'd definitively broken a DIFFERENT level (3.82) on the upside! So it's a wash for the moment. Volume is non-existent. AND Nothing means anything anyway until next wednesday.
But Why Matt? WHY!?!??!
Look... I already qualified the original statement of "nothing means anything until Wednesday" by saying the following in yesterday's close:
Certainly it mattered quite a bit for many of us in some immediate ways, but I'm talking about with respect to what the day says about where all of this volatility is going. Today doesn't say much of anything. In fact, nothing will until Ben and Co. hit us with the minutes on Wed. Even then, there's an equal chance that the "digestion" and decisions about what is said will take days more before causing a momentum change in market psyche.
But I'm getting the feeling that some additional discourse on the topic would be appreciated. I wish I had the patience and wherewithal to write a full article on: Why Wednesday's Fed Announcement Matters, but alas... The mood of resignation persists at MBS headquarters... At least the following treatment can be mustered... I'm going to number the thoughts since I'm guessing we'll be talking about them by and by, and it may be useful for y'all to be able to reference the numbers..
- I don't think Fed announcements, in general, are NECESSARILY important at all as far as rates are concerned as most of the verbiage is middle of the road and often vague. Dont get me wrong though, they have the potential to be extremely influential.
- That said, I don't expect the Fed to go out on any limbs next week! I repeat! I am NOT expecting some earth shattering revelation, bearish or bullish (though I'd be happy to see one). No change to securities purchase program. No real shift in sentiment regarding the "fragility" of the economy. If anything at all the Fed should re-iterate their intention to keep the Fed Funds rate range bound near 0% as inflation is not a near term concern.
- I'm expecting the wording to give as vaque of an indication about future policy as possible, but to still cover the points that absolutely must be addressed.
- I'm NOT expecting, let alone predicting, that this will bring about a huge positive change for MBS in and of itself.
- Conversely, I'm NOT expecting that it will bring about a huge negative change for MBS in and of itself.
The significance of next Wed. is best understood when a couple of assumptions and/or "givens" are taken into consideration:
- There are cycles of uncertainty in markets that go through recessions/depressions.
- There is uncertainty compounded by FEAR of things getting worse, which occurs as the recession materializes
- There is uncertainty compounded by hope and pessimism, which occurs during periods of relief, bear market rallies, and the like..
- There is uncertainty compounded by hope and pessimism, which occurs as the recovery materializes.
Until recently, the economy was pretty "certain" about it's own crappiness...but enter the recent slew of positive economic indicators (or "less bad" if you want) and the stable bullish performance in equities and say hello to the crowd of reluctant knife-catchers. Remember people!?!? We had a similar phenomenon in 2008 when things were going to hell in a handbasket. No one knew just how crappy things could get. There was mass UNCERTAINTY. And what did we see? What buzz words dominated the headlines and continually oozed out of the talking heads? "VIX?" (whatever that is...). How about "Capitulation Trade? (not sure on that one either...). Basically, I'm seeing history repeat itself in that "VIX-like" indicators are all the new rage. Some other MBS blogger that thinks he's smart (actually AQ is...and you'll see why in a moment) has been talking about ATM swaption straddles...something about bp vols... I don't know... I think what he's getting at is the same thing that the talking heads were getting at back in the day: more and more traders have been getting long on volatility. In other words, the poo gonna hit da fan one way or the other! And then capitulation? God, I HATED the age of buzzwords in the media! But they did then, and do now have a point. If the whole market is selling debt (tsy's and MBS), it introduces massive quantities of extension risk, which prompts the catastrophic duration shedding or convexity hedging (that we've been enduring EVEN by trading accounts that WOULD NOT OTHERWISE BE SHORT THAT DEBT!!!!). In other words, the fixed income market capitulated...a snowball, perhaps, is a good analogy as unwilling skiers, perfectly happy to keep going UP the mountain, were forced DOWN the mountain by the hoary spinning ball of doom. AQ refers to this duration shedding phenomenon as a "panicked crowd fleeing a burning building" everytime the yield curve shows signs of steepening.
(Jeez... this is getting pretty close to "article" length... Anyone know a good PR person?)
To get to the point, we have 2 of the 3 types of uncertainty referenced above: #'s 3 and 4. Market bulls are hoping for the recovery, but the fashionably EMO (emotional for the nontrendy) bears like me, just don't want to see the light. Hope and pessimism. In the case of #3, I'm right, in the case of #4, they're right. Who's right? Don't know yet. It just doesn't feel safe to think we won't have another leg down before a real recovery. But you're happily entitled to your own view. But "who is right" DOES NOT MATTER! What matters is the uncertainty? To rekindle my favorite talking head cliche phrase of 2008, "no one wants to catch a falling knife." Now once again, the proverbial knife is getting close to it's target, the health of our economy. Does it hit handle-side-first and the bulls win or does it strike pointy-side-first signaling a groundhog-like 6 more weeks of economic winter (or is that months? No... Couldn't be years could it? That's never happened, right? Not even in Japan's lost decade! Oh wait, a decade is 10 years isn't it... Oh man.... I guess some uncertainty might be warranted... Carry on...) Now for closing arguments:
SIMPLE AS THIS:
All of the preceding was Point A.
Point B: Bernanke and the FOMC have been inextricably intertwined with the directional movements that both the recession and potentially forming recovery have taken.
Point C: [Point A is picking up speed in recent weeks as evidenced by the increasing volatility expectations*. ] AND [We get to hear "Point B" talk about the whole kitten kaboodle in an official format for the first time since "Point A" got really out of control ]
*(If AQ says something like "3m/10Y proxy currently over 200bps," he's basically trying to say: "volatility=high". Moral of story: we're not making that up. Volatility really has been shooting up.)
Final thoughts....
Ben ain't dumb... He and his colleagues know everything I've just written (and more). Even if their organic thoughts on the economy, unencumbered by the weight of uncertainty and expectation, would not be a market mover in the slightest, they know that a significant portion of the market, nay, the world, is waiting to hear what they have to say. Now, this IS NOT the ONLY thing that matters right now... There's plenty of other clues out there that could help the market know where it stands. But I'd argue, EVEN if the announcement itself contains no immediately influential verbiage, that the simple OCCURRENCE begins the cogs turning in the market's symbolic "decision-making machine." You know how it is... Even if a meaning isn't INTENDED, it can always be INTERPRETED. So hopefully that clears a bit up for you in that I don't know whether or not there will be a massive amount of organic meaning or suggested interpretion from the statement itself, and of course there's plenty of other contributing factors at play here. BUT, I'd bet that degree to which this particular FOMC announcement will be the catalyst for INTERPRETATION as compared to other viable events is perhaps more disproportionately high than any other 2:15pm on a Wednesday just before quarter end. And just to frustrate you a bit more.... Even though nothing means anything until next Wednesday, there is a chance it STILL might not mean anything for days to come! Have a good weekend!
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