As reactions to the economic data gradually improved and were compounded by next week's tsy supply being announced at $115 bln versus an expected $111 bln, Tsy's took a dive and stocks skyrocketed, adding to the woes for MBS. The 4.5 was down 21 ticks to 99-15. The Dow ended just shy of 9070 and the S&P went out at 976, both the highest levels in at least 6 months. The back up in tsy's brought the 10yr yield to 3.66. In less influential news, but still adding to the sense of bullishness, Existing home sales rose 3.6% versus an expected 1.5% yet almost a third of this can be chalked up to distressed sales. Supply edged down again from 9.8 to 9.4 months, finally reaching levels meaningfully below 10 months. But how well these improvements will hold up considering this week's rising rates and ongoing HVCC woes is anyone's guess.
Though already alluded to here and explained in greater detail today earlier by AQ, this decrease in prices is not a factor of some sort of weak demand for MBS or some sort of ball the fed is dropping. In fact, the Fed continues to more than account for the relatively modest amount of new supply, buying over $4bln per day on average. The decreases in prices, and especially the accelerating losses in the lower end of the stack are much more readily attributable to accounts adjusting their exposure to the yield curve and its more feared components during times like this, convexity and extension risk. Did someone say "snowballing?" If that concept is still a bit foreign to you, let us know.
Plain and Simple: Think of fashion over the decades. Think of the last 6 months as the Bell Bottom craze. Think of the sell off as numerous and diverse pieces of data suggesting that Levi's (stocks, recovery, higher benchmark rates...) will some day dominate the scene, and people are already starting to prefer them. SOOOOOOOOOOOOOOOOOOOOOOOOOO.......... Not only do you have some selling to adjust to the stimuli indicating an increased market share for Levi's, but you ALSO have preemptive selling as a jeans-wearers prepare for a future without Bell Bottoms in that they'd rather sell them now and get something for them as opposed to the future where they look to be worth considerably less. The Bell Bottoms are like long duration bonds at low rates like 4.5 MBS and the 10yr Tsy, savvy?
As far as the bigger picture damage done today, it's a middle-of-the-road kind of sell-off, leaving us near middle-of-the-road recent price levels:
We did break through the 50% retracement at 99-19, but at 4 ticks, it was fairly close and will require confirmation tomorrow before creating concerns about the next two price levels. In dotted yellow, 99-11 stands the first floor we hit when selling picked up in May, and though not on the chart, the first floor hit after late December Euphoria finally changed course. Then, with nice June and July bounces, 99-00 in teal should also be a signficant level. If you're looking for reassurance or some mitigation of frustration, consider the dotted red line that shows we are still slightly higher than the uptrend created by the two most recent major lows in mid June and mid July.
On the next chart you can see the S&P reach all the way back to it's Q408 spike and getting close to the dotted line at 1000 which would be a very important technical level indeed as it was over a hundred full points between that and any semblance of trend in the S&P. As far as searching for solace here, stock futures have fallen after the close on weak Microsoft and Google earnings. Hopefully some buyers remorse will make it's way into the mix and "seller's remorse" for the duration dumpers and we can hang on to the current long term uptrend in MBS (again, that's the dotted red line folks...) come tomorrow.
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