Victory At The Gates My Friends...  The October attack on our long held support levels has been repelled and our fixed income kingdom lives to lend another day...  MBS rallied a respectable 15 ticks in the 4.5 to 100-23, well above long term support levels at 100-10 and 100-16.  In tsy's, the 2yr dropped to .93 on the day and the 10yr improved 28 ticks in price, good for a yield of 3.45.  And yes, all of these levels are right back in that "warm blanket" range of the last 2 months...

Crash Course On Technical Analysis Concepts

  1. The "Floors" that mark the lower boundaries in price trends = SUPPORT.   These can be horizontal or drawn along uptrends and downtrends.  You'll see both today..
  2. TREND is a broad concept that can be defined in many ways.  For now, just think of uptrends as higher highs and/or higher lows.  Vice versa for downtrends. 
  3. TRENDLINES, then, are the straight lines that can be drawn connecting these highs and lows (usually highs to highs and lows to lows, but in the case of INTERNAL TRENDLINES, they can connect both)
  4. The 100-10 price level in MBS is a well-established trend of support.  Also the bottom of the range trade
  5. When Prices approach and break that trend, it can be called a TEST, RE-TEST, VIOLATION, or even BREAKOUT.  I use all the terms interchangeably to confuse you as much as possible.  Now you know...
  6. The first approach and even the temporary break-out of prices to a trend-line is usually a TEST.  A test can fail (bounces off) or succeed (violation, breakout, successful test, successful re-test, etc...). 
  7. RE-TEST, then would just be another instance of prices approaching that trendline.  As you can see on the first red line below, 100-10 has seen it's fair share of re-tests.  All failed until Yesterday.
  8. The term FAIL, in this context can be thought of as a "bounce."  In other words, prices did not break through the trendline.  
  9. Gets a bit tricky here....  A TEST can also be a VIOLATION but still NOT constitute a successful test.  The "SUCCESS" of the test/re-test is where the concepts of statistical significance come into play...
  10. So although on a visual level, prices did indeed break out of their long term range yesterday, Today was in fact the ongoing TEST of that breakout.  It was being TESTED to see if it would meet certain requirements of statistical significance.  Different analysts have different metrics.  We're currently using the following standards:
      1. Must break by 3 ticks or more
      2. Must be more than 3 ticks through the trend by the end of the third day
      3. Significance adjusted for the fundamental backdrop such as event risk, headline risk, and MBS settlement
  11. In Short, The test Failed!  Hence the markup on the charts below...  The technical indication is that, although under scrutiny, the previous trends are once again awaiting a test ("re-test" anyone?). 
  12. If MBS Prices were to break through the trend with significance, this would be a "confirmation" (or confirmed breakout, or confirmed re-test, or successful re-test, or whatever!)...
  13. At that point, the previous trends would still be considered, but the broader assumption is that the old trend had shifted and analysis would then focus on whatever new trends we decided to make up this time...  (whew.. thank goodness that 100-10 and 3.5 worked out so well for us...)


All of the preceeding is not only necessary for your continuing maximum enjoyment of techs..., but also explains just how in the world we could be a full 5 basis points outside the super long term, hard-as-concrete 3.5 range in the 10yr and not be freaking out on the lock button yesterday.  The "event risk" by way of the tsy auction and the fundamental considerations of the previously weak 30yr auction helped to temper that default panic.  There's no way we could have known how the auction would go for certain, but the point was not to let yesterday's breakout make you think that the trend had officially shifted.  And here we are a day later with none-other than the "failed retest" himself:


The intraday price movements were elegant and exceedingly interesting today...  Here's what you should notice in the busy chart below...

  • Yesterday established the "as bad as it gets" pre-auction hedge. 
  • This AM's prices agreed with the two prominent low points in MBS price yesterday by rallying cautiously in the AM and not going below the support set with yesterday's lows.
  • rally was range bound as uncertainty still loomed ahead of auction
  • rally met the auction at EXACTLY 100-16, not the outright lowest point in recent weeks, but one of two floors of the range trade, and in fact the one that got more action.
  • good auction results cause additional rally off 100-16, and (here comes the common theme) BECAUSE OF ONGOING UNCERTAINTY ALWAYS A DAY AWAY.....  it's right back into the range...
  • What better to inform the range for the rest of the day than the exact same range from this morning?


    • TIMEOUT!  This is me, MG, pulling everyone aside for a quick fireside moment...  You guys see what's going on?  Well, maybe I don't even see what's going on, but to me, it's almost as if the rally was an "on/off" switch today and yesterday.  If the rally was off, we sink to the previous lows of the day at 100-06.  If the rally was on, we advanced at the same pace regardless of the reason for the rally being on.  Sure the auction itself causes a spike in the data, but it's only temporary.  This rally ended the same place it set out to this AM...  The auction merely "allowed it to continue." 
    • These are glimpses at slightly more complex inner workings of the range-trade mentality.  Traders merely figure out which way they're going, but there's nothing that's certain enough about our economy to suggest HOW FAR THEY GO!  So knowing that NO ONE ELSE CAN ANSWER THAT EITHER, the range trade is infinitely interdependent and self-reflexive...  Merely a sum of individual components operating under one of 3 directives...  GO UP, GO DOWN, STAY THE SAME... 


  • On to the 10yr chart, check out the lower red line which is an extension of yesterday's outer limits
  • 10yr yields bounced twice off that same trendline today! once as resistance before the auction, and then as support into the rally following the auction


  • On the stock chart....  Well....  Nothing to see there...


The bottom line should be fairly clear... Uncertainty remains, but "less bad" uncertainty about the short term direction of rates with 1 of 3 auctions out of the way.  And the best part is: IT COULD ALL CHANGE TOMORROW! 

MBS, Tsy, and LIBOR Quotes


  • The FN 4.0 went out the door at +0-20 at 98-05 yielding 4.190%
  • FN 4.5 ended the day +0-15 costing 100-23 which a bid side yield of 4.414%.
  • The secondary market current coupon is 4.369%.
  • The CC is
    • +91.7/10yr TSY,
    • +73.8/10yr swap.
  • The FN 4.5 is
    • +96/10yr TSY
    • +78/10yr SWAP