A long weekend lies ahead in which much may...or... may not occur. Seems like a good time for an "official announcement" from abroad doesn't it?
The majority of markets are out of office...
We are closed on Monday for President's Day. Mainland China is out from Monday to Friday for Lunar New Year while Hong Kong is detached until Wednesday. Korea = no markets on Monday. Japan is open but Brazil gets a pass for three days of CARNIVAL. Canada has Family Day. They're closed Monday. India is out for Maha Shvratri today. The CAC is open in Paris and so is the DAX in Frankfurt. The French only get three days off...all year!
Guess who else is closed: GREECE! for Ash Monday.
Such an "official announcement" from abroad will be viewed as friendly by stock traders. With that in mind, perhaps officials will save any releases for a time when equity bulls were in attendance to push the BID button. This raises a speculative eyebrow for a rates trader...
The stock lever, although detached at times, has generally been a decent guidance giver for rates lately. If a concrete rescue plan is offered by EU officials over the weekend or on Monday, when the majority of the marketplace's attention is engaged elsewhere....it would help soften the blow of an equity recovery rally induced bear steepener in the bond market (higher "rate sheet influential" benchmark yields).
If "official" good news is fed to the press when the US market and others are intently watching their screens on Tuesday...the knee jerk could be violent. "FLIGHT TO SAFETY" funds, currently allocated in risk averse TSY bills and notes, would be sold in size. This would push yields across the curve out of recent ranges...MBS prices would plummet and rebate would be reduced. (Should I put flattener back on?). This is the expected initial reaction at least
This of course assumes "ITS A TRADER'S WORLD" is still in effect. (It is)
Since we are still not willing to concede that stocks are done rallying, you should know that we are operating under the assumption that the most recent equity down cycle trade is a hiccup in a broader, LONG term recovery process.
Hiccups are to be expected though. We will experience periods of volatile data, we will witness nervous reactions to unexpected headline events. Because investor confidence is still shaky, panic will be allowed to spread quickly. In these times "SELL NOW ASK LATER" will be the preferred trading tactic. But in the BIG PICTURE, while recovery progress may be slow, the worst will still have been avoided. Life will go on.
Dont get me wrong here....we dont think stocks are a runaway freight train, we just dont expect a massive retracement. This partially explains why our general outlook for benchmark rates is....generally bearish.
That doesn't mean all hell is about to break lose on the yield curve though. Just as we rely upon the "WORST CASE SCENARIO WAS AVOIDED" perception to be an explanation for optimistic equity behavior, we lean on it as supportive backing for an extension of the RATES RANGE TRADE.
The idea of "the worst case scenario was avoided" is being broadcast loudly through the cautious actions of the Federal Reserve. Their defensive posture forces us to consistently reconsider our perceptions of economic reality...something especially painful for members of the housing industry. But this reminds us that we're just barely progressing off of an historic contraction in economic activity. It puts the marketplace on the defensive at all times and helps maintain stable demand for risk averse fixed income assets...a key to the mortgage rates equation.
Plain and Simple: Because the overall economic environment is cloudy and the Federal Reserve is still quite cautious, investors will remain defensive, which will prevent benchmark Treasury yields from moving significantly higher. On the flip side, equity bulls will rely on "THE WORST CASE SCENARIO WAS AVOIDED" perception as a reason to speculate that long term "buy low, sell high" investment strategies will be profitable. This will help stocks maintain positive progress instead of retracing back to "worst case scenario" lows. This risk taking attitude combined with a slowly recovering economy (anything but drastically worse) will prevent benchmark 10s from revisiting the days of old when yields held between 3.27 and 3.51%. The rates of 2009 look to be a thing of the past.
This is the first part of the mortgage rates equation. READ ABOUT THE REST OF THE EQUATION
And now, MG will take it away with the pictures for my thousand or so words...
Thanks AQ... I have a few words myself, but not too many... Basically, the following charts will alternate between MBS and Treasuries and should combine to support the notion that rates in 2010 will not be the rates 2009, and despite operating with the 10yr tsy in the 3.50's last week, we certainly have not seen any evidence to suggest this is a better than random probability for the future. In fact, it's probably worse....
Starting simply enough, the following two charts will give a view of this week in MBS and tsys. Prices are generally lower and yields are higher. Note the 101-00 inflection level on the FN 4.5.
With these two hourly charts, things get quite a bit more intense and suggestive. First MBS...
There, again, is a readily visible inflection point just over 101-00. We can actually see this holding off the selling in Nov and Dec as support, and proving to be tough resistance in late January. In this zoomed out view, we can clearly see the breakout of early February failed (at least for now...)
This is even worse...
In the TSY chart below, there are two big negatives for the rate outlook. The red circles show a clear bounce on support around 3.69, but after moving much higher this week, that same trendline now holds as RESISTANCE. Beyond that, 3.60 looks like a nearly impossible level to meaningfully break so far this year... If we can break it, something will have to change.
Now zooming out even more, the FN 4.5 chart below validates the significance of the high 100-20's price levels as inflection points. By far, prices bounce more there, either for better or worse, than anywhere else.
As far as the daily tsy chart, AQ said something like we're still very much range-bound? Well... Here's your range...at least the mid term range. To be fair we'd need to take that all the way up to 3.85%
Just a bonus chart to show relative movement between MBS and tsy's. We inverted the tsy yields so they would move in the same direction as PRICE for better comparison.
Finally, the big Nasty: 10yr Treasury Futures Contracts...
From top to bottom and knowing that the teal is the price itself, we'll break down the techs
- red line is 200 day Moving average
- Orange is the 14 day. Notice that every time prices have held above the 14 day MA for more than a few days, that when they've fallen below, prices moved lower in subsequent days.
- MACD forest. Can't get too far into detail in this space, but suffice it to say, the fact that there was "one big upside down mountain" followed just now by "one big upside up mountain" suggests at least some size of upside down mountain in our immediate future. That = bearish for rates
- RSI. Just threw this in for those who like it. Suggestion: closer to overbought than oversold
- Bottom Section is Volume
Everyone have a great long weekend...