We were forced to sit in on another slaughtering today. It didn't start that way but by 5pm the 10 yr note had totally shed all gains, gone red, and broken two or three more support levels on its way up to 3.538%. The FNCL 4.0 MBS coupon actually revisited the 96 handle in after hours trading. April was the last time 4.0s saw the 96s. Lenders repriced for the worse.Lenders repriced for the worse again. The best execution 30-year fixed mortgage rate is now 5.00%


Lots of explanations out there. Not much of a consensus on the actual cause of this mess though. Everybody seems to be grinding a different axe or taking another angle.

Onlookers attempt to rationalize but always end up wrapped in a web of conflicting conclusions. Me included. We have so much on our plate. How could anyone make sense of it all?

Tax cut extensions. QEII. Inflation. Deflation. Reflation. Disinflation. Weak dollars. Strong exports. More Jobs. Strong dollars. Weak exports.Fewer Jobs. Investments in productivity. Faster factories. Fewer Jobs! Super high savings rate. Seasonal spending sprees. Temporary hiring? Long term unemployed!?Lazy labor force. Lower wage rate.  Private payrolls growth. WAGE RATE GROWTH. Aggregate demand. Foreign investor demand. European states. State and local governments. Budget Deficits. Credit Ratings..............currency crisis.....NORTH KOREA...IRAN....CHINA......2012. BOOM.

And I didn't even mention housing or financial reform or the assorted entitlements that may or may not lead to the downfall of the greatest country in the world.


And Then. To make matters worse. This is all being digested in a trading environment that is primed for price volatility. Allowing for an easy misinterpretation of the market's exaggerated momentum which in the process has drawn more onlookers who are attempting to explain which leads to more ambiguity which takes us full circle on what I am calling the "UNCERTAINTY PREMIUM". <---There it is. The root cause under the recent spike in rates.

The market is really just glad to be getting out of 2010 with profits on the book and no FBI on its back. And unfortunately the buyers we need to get this sell off moving in the opposite direction are clearly sitting on their wallets....watching as fast$ day traders commoditize the benchmarks that dictate the directionality of our mortgage rates....which has sadly led to an incredulous amount of snowball selling. Remember the relentless rise in oil prices during the summer of 2008? The current herding behavior of the TSY market is very similar. Bond vigilantes = day trading fast$))

In the primary mortgage market this snowballing is illustrated via the chunky drop off in 30yr 4.0 MBS coupon prices. FYI THAT IS A TWO DAY CHART...LOOK AT THE Y-AXIS....YESTERDAY FNCL 4.0s WERE OVER 99-00!!!



All this nonsense certainly makes you wonder about the sudden shift in economic outlooks we keep hearing about though. Especially when you stop to consider that all economic outlooks are essentially incomplete  because at least one of the underlying assumptions in every model is pushing the boundaries of "guesstimating". Leaving much room for a wider margin of error. Or as the Federal Reserve puts it, "Participants continued to attach an unusually high degree of uncertainty to their projections"

So Yeh. The "uncertainty premium". And yes I think this sell off has been exaggerated. No I do not know when momentum will turn for the better. But if I had to venture a guess it would probably revolve around the release of the December Employment Situation Report on Friday January 7th, 2011.

PS. I spent much time talking about inflation this morning. MUST READ