Things continued much as they'd been earlier in the day with MBS flirting with 102-00 on the 5.0 and the 10yr doing a similar dance with 3.5. There was a lot of back and forth in a relatively tight range. One got the familiar sense that machines were making short term technical decisions as opposed to humans making strategic ones. All in all, the low volume and robotic directionality made it feel like this holiday week will only be three days long instead of four...
Several reasons for this, both potential and probable. First of all, those who will be taking positions this week would much rather wait for the data to actually start rolling in or additional month/quarter end variables to be known. Either way, not much of either available today... Then, of course, we have the supportive week for MBS coming up (remember, "supportive" speaks more the the "vs. treasuries" scene than it does to raw price gains... If the whole of fixed income is suffering, supportive won't do us much good) with class A settlement, and prepays. Apart from quarter end variables being defogged, there's the simple probability that some of the treasury and cash positions used to dress those windows can be placed back in MBS. The recently widening spreads certainly wouldn't disuade this.
Speaking of not disuaded, the fed was not disuaded from buying pretty much all available supply on the dips today. In other words, we saw the big buys come in when spreads gapped out. So the above factors suggest a range trade in a broad sense while this "too rich vs. too cheap" spread ideology keeps MBS adhering to the same range bound fate as tsy's. Long story short: calm before the storm. Might be drizzle, might be something more violent. Whatever the case, the markets were content to let their R2D2's call the shots today in the absence of data. Don't see it based on above charts? I know MBS looks pretty choppy today, but that's just a factor of the range of the y-axis. Let's zoom out to five days so I can show you what I mean. We basically worked our way into a range before FOMC last week, saw some positivity after it, but having made it over that hurdle, find it premature to jump over 102-00 without the chips of quarter end, settlement, and others being down. In a work, we're waiting for further guidance:
With the following laundry list of data, tomorrow is one of our best pre-quarter-end shots at getting some motivation behind the trade.
- Case Shiller at 9AM
- Chicago PMI at 945AM
- Consumer Confidence and State St. Investor Confidence at 10AM
- 4 week and 1 yr bill auctions at 1pm
- 3 instances of Fed Speak with Bullard, Hoenig, and Yellen all on tap at noon, 410pm and 9pm respectively
Even then, we're up against bigger fish later in the week on into next week. What's the point? The ride starts tomorrow. We don't know if it moves very quickly to start, but considering where it might go, you should certainly pull down the safety bar. Does this mean lock now? I don't know... Does it? We've put together some good gains and certainly, you should always be "Gut-Floppin,'" but there are arguments for both sides of this case. Now that FOMC is past us, tsy's and MBS can get back to taking much more of their guidance from economic data. So to whatever extent you fear the bullishness of the data, locking is the tacit suggestion. Even then, the extent to which post-quarter-end reinvestment will benefit MBS, although expected, is unknown. It's probably too soon to make any decisions to lock a majority of one's pipe, but as tomorrow could kick off a few weeks of chop chop, the most sensitive deals should get a 2nd glance tonight. If the lock cutoff is past for you tonight, then take a look at tomorrow fresh. Now that we've made it back to the low end of 2009's previous trading range, we're perhaps in the most uncertain of our recent "wait and see" periods where we'll find out if we can buck the 7-8 out of 10 historical precedent of summer fixed income weakness.
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