Watch or read today's market news and you're likely to hear phrases with some iteration of "for the first time since..." being thrown around liberally. A few of the notables for us MBS devotees:
- MBS spend two days above PAR in 4.5's for the first time since may (and 102-00 for 5.0's)
- Stocks at lowest levels since May (almost since April!)
- 10yr yield at lowest point since may
- For the first time in more than a week the 2s/10s has started to flatten discernably
- And though no "May" is involved, for the first time perhaps ever (depending on your construction of events) a 2nd fiscal stimulus package has been suggested by one of Obama's advisors
Although volume was below normal, we obviously had to have some gains to be able to say the above MBS-specific "first time since..." snippet. Data was limited today, with mainly the 3yr auction to digest. It was a bit of a jagged pill, and caused a whipsaw of volatility in its immediate wake, but as investors came to terms with the auction results and as stocks broke certain levels for the first time since (oh no! They've gotten to me!) May, Tsy's caught the bid (aka "people bought them") and MBS followed.
At first blush, the 102-10 ceiling at the end of the day in 5.0's looks like it might be significant. So let's take a look back over the year:
Indeed, it looks even more relevant on this chart as we see it was the only meaningful ceiling that has been tested since Black Wednesday. Furthermore, the previous two yellow circles show that it served both as a ceiling that gave pause to the initial exuberance surrounding Fed MBS buying and as a floor that buoyed prices during the few golden months when MBS could seemingly do no wrong. So there MAY be something to this, and for once, I'm not being sarcastic. I'm really only saying "MAY" for a reason (and no no no... It has nothing to do with any "first time since MAY" type stuff). The reason I'm somewhat tentative about this has to do with the price level. Simply looking at the 4.5 chart below the 5.0, you can see the 4.5 is nowhere near touching it's historical levels from those same time periods. That's convexity 101 in a nutshell... So if these same internal technical levels were being hit on a coupon with a price near PAR, it would be much more significant. But demand is going to taper off the higher prices get... And though it may sound like heresy right now, 5.0's could be forever capped at 102-10 and we'd all be just fine. 4.5's could rise MORE than enough in price to give you 4.5 rate sheet par, especially after some primary/secondary spread tightening.
But that is probably neither here nor there, and I'm not suggesting that let alone predicting it. What I am getting at are two things. One: in some ways, the market crossed some reasonably significant milestones today. And Two: there may be another current coupon title bout coming up if 5.0's get too "long" in the tooth, which might be suggested by current price levels. As far as the milestone crossing, the mortgage broker in me is happy to see the gains, but the technical analyst in me has to tell you that they don't mean much unless we can hold them long enough and by a wide enough margin to constitute "confirmation" of the shift. We're not quite there yet, but close.... If only we had some sort of data coming in tomorrow that would speak to fixed income markets... Oh wait! There IS that whole 10 yr auction thing. Long story short, I think we'll have a better sense of direction by the end of the day tomorrow. Considering the technical levels today, tomorrow's auction is either going to give pause to our recent rally or help it maintain momentum. Given the mixed signals in today's auction and considering the fact that 3yrs is so very far away from 10yrs as far as traders are concerned, there is no clear suggestion from today's results. Whatever the case, you'd have to admit, things have been "going our way" to a much greater degree than in the naughty and yucky month of June. So perhaps when Sinatra advised: "If nothin's shakin' come this here July..." he was just trying to get us through until now.
Now go back and read AQ's morning post. What we're trying to say is that, although we're not saying MBS is definitely fixin' for a correction, we are saying that locking deserves harder looks when we're higher than we've been in over a month. High probability of directionality tomorrow, but as always, a chance of the end of day readings being relatively unchanged. In other words, the markets could say: "more guidance please." The great thing about the auction is that it's mid-day (1pm). So if you were wanting to float, you can at least avoid any potential auction related losses by letting it ride overnight.
Oh, and incidentally, the kid in me still likes the frosting...
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