Last Week

- Fed Finally Tapered

- Bond markets lost ground through Thursday morning

- Steady recovery after that

- Shorter-term moves lost inside longer-term trends (charts)

This Week

- Early close on Tuesday and full close on Wednesday for Christmas

- Some economic reports on first two days

- Participation levels remain to be seen

- Volatility is always possible, but significance is unlikely

Strategy

Of all the holiday weeks of any given year, this one has the biggest effect on market participation.  Trading activity will almost certainly be exceptionally light.  While this doesn't have any particular connotation for volatility (indeed, light volume can even encourage volatility) it does mean that we shouldn't be as willing to read long term significance into the movement.

Then again, there really hasn't been any significant movement that changes the long term trends.  Even when we consider last week's Fed tapering announcement, the accompanying market movement gets lost in the shuffle of a fairly narrow range.  The charts below show these ranges both for Treasuries and MBS.  Incidentally, if MBS look choppier than Treasuries, a lot of that has to do with the fact that the MBS chart is daily vs the hourly Treasury chart.

The most likely scenario is for markets to go through the motions this week and maybe engage in some year-end position squaring on Monday and Tuesday.  Position-squaring can be thought of as a bevy of bar-goers who've spent the whole night buying each other drinks on tabs finally settling the tabs, figuring out who owes who how much, and heading home.  In the trading world, position-squaring is a market-mover unto itself, and an extra potent one on light holiday weeks around the end of the year.

If any data has a chance to cause any movement this week, it only has Monday and Tuesday to do it.  Consumer Spending and Consumer Sentiment reports are both out Monday, but no one is eagerly anticipating these.  Tuesday brings Durable Goods, FHFA House Prices, New Home Sales, and an early close.  Markets will be completely closed on Wednesday for the Christmas Holiday, and open as usual on Thursday.

Charts

Narrow trading ranges in Treasuries and MBS for at least two months now, but unfortunately slanted in unfriendly directions.

Fannie 4.0 MBS