Couple reminders before we get into the reasoning behind the intraday 10 yr TSY note rally.
1. Its a trader's world, we're just living in it!
2. Last Friday we told you that we have been doing a lot of "Market Profile" analysis. The CBOT defines "Market Profile" analysis as:
"Market Profile is a graphical organization of price and time information. Market Profile displays price on the vertical axis and time on the horizontal axis. Letters are used to symbolize time brackets. Market Profile is an analytical decision support tool for traders—not a trading system. Market Profile reveals pricing patterns from any market as they develop. By effectively organizing price and time information, it is possible for traders to see which price areas the market is accepting or which ones it is rejecting…and adjust their trading styles accordingly."
3. The lack of economic data on the calendar forces MBS to take directional guidance from the gyrations of the yield.
Ok...That said...
Why The Intraday Rally?
Although this is not an actual Market Profile chart, it will help illustrate how we determine changing market sentiment even though we are not on the trading floor.
Below I charted the prices of the Sept 10 yr TSY note futures contract. This is one of the securities that I run analysis on to provide you guidance on "rate sheet influential" MBS coupons (among lots and lots of other market indicators). Notice, on Friday, at the open outcry (open of trading on CME) the 10 yr contract FAILED an attempt to move over 117-07. At that time volume spiked and prices fell dramatically. However as prices found a more stable range, volume slowly tapered off as positions were closed out and traders went into "wait and see mode". Now look at today's rally...
Notice that as traders slowly pushed prices higher today, volume began to pick up. Then, right around 1230, traders reached a crossroads. At that time, the market was testing 116-16...once probes at support levels failed, VOLUME SPIKED and a massive rally ensued because attempts to move prices lower FAILED. This was as a result of a snowballing of sentiment. All morning traders have been testing lower support levels...and all morning tests have PASSED, prices have made higher highs and higher lows.
Now check out the historical significance of where the rally stopped out...look at the big RED CIRCLE...notice that today's rally ignited at the same price range that the 10 yr contract fell to at the open on Friday (near 116-16). That level served as a key technical resistance level in today's rally. Once traders surpassed that price range momentum picked up and volume spiked...leading the 10 yr contract to the same price level that moderated the range before 830AM selling on Friday...117-03 . Its just a return of status quo!
Plain and Simple: This rally started as bargain buying at 730AM (see MBS MORNING where I discussed block buying at the price lows), then the rally picked up steam as more nibbling occurred, then some short covering took place, adding activity, then volume spiked as traders jumped on board the profit train. Momentum carried this rally steadily higher and higher! ITS A TRADERS WORLD, WE'RE JUST LIVING IN IT. DO NOT TRY TO MAKE SENSE OF MARKET FUNDAMENTALS...THEY ARE ALMOST USELESS AT THE MOMENT!
The rally in the 10 yr sector pushed the cash market TSY note yield down to 3.57...and because "rate sheet influential" MBS coupons are playing follow the leader.... MORTGAGES RALLIED....and guess what..now that the 10 yr has gone sideways, so to has the FN 4.5 MBS coupon.
Got it?
2s vs. 5s: 147bps
2s vs. 10s: 262bps
5s vs. 10s: 115bps
NYMEX Crude: 64.14
Dollar Index:78.89
WATCH FOR PROFIT TAKING...there is no sign of long term bullishness in this rates rally as the S&P is still testing 947...price action could get whippy if the S&P shows signs of breaking 947/950 with any strength (volume). That means...just as fast as reprices for the better came in (and they did)...so to could reprice for the worse. Stay defensive...we are!
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