The bond market has been building
toward today for some time-weeks, maybe months.
The most recent stage of the MBS rally has been in motion since April 11th
when underlying benchmarks were able to hold onto ultra long-term support
that stretched back to a bullish trend which began BEFORE the financial crisis even unfolded. With the two exceptions of the initial crash
itself in 2008 and its encore performance into the fall of 2010, this trend has
contained ALL of the movement in the 10yr yield. It looks like this:
We’ll be focusing exclusively on the 10yr Treasury note
tonight due to its ideal role as a benchmark of the general “bond
market.” While it’s true that loan pricing is derived
from MBS, our goal tonight is to examine long-term, big-picture
movements. After all, we know where we’ve been. These 10yr charts are
better places to look
if we want to understand more about where we might be going.
Now! That sounds
dangerous! Predicting the future? That’s not exactly the best idea at this particular
point in economic history. But even though we’re not willing or perhaps even
able to feed you the answers to questions about what the future holds, we can
certainly provide you with some food for thought. Seeing as how we’ve made so much of “history
repeating itself” recently, tonight’s menu offering is for those who hunger for
the ongoing bullish perspective.
things happen in the same way that our view of “repeating history” suggests? It’s certainly possible, but we want to warn
you up front that this is only one of the possibilities and history obviously
can’t repeat itself forever. That said,
it has done a fairly good job so far!
The chart above shows 10yr yields from 2006 to present. The two squares indicate the two stretches of
time in which history can be thought of as repeating itself in terms of how
yields are moving. Take a moment to
match up the various color-coded peaks and valleys between the two
sections. Here’s a play by play from
left to right:
- A massive “double top” is seen over the course
of two years with similar dips early in the cycle (orange), similar false
bounces in the middle (teal) and the 2nd of the two tops in the blue
- From there, 3 consecutive red areas highlight
the various stages of consolidation and confirmation experienced by yields as
they fall rapidly.
- Then, in the lowest section (white), the long
term bounce takes almost exactly the same shape. Uncanny similarities here!
- The three small teal sections that follow show
how in each case, the most prominent peaks and valleys that followed the white
section were strikingly similar in proportion.
- The 2 time periods culminate in the light purple
area at the far right where yields move decisively lower once they break past
the previous low in the adjacent teal circle.
Pretty fascinating stuff, right? And while it could turn out to mean
absolutely nothing about the rest of 2011, what’s the implication were history
to keep repeating itself? It’s fair to
at least entertain this eventuality with the impending conclusion of QE2, the
gathering storm of progressively weaker economic data, and what many consider a
central component to the ultimate recovery-the housing market-still very far
from being even on its way to a healthy state. AQ has described housing as “stagnating in a pool of its own filth” actually.
Given the somewhat lower amplitude of the more recent stage (that would
be the big grey square on the right, in case I’ve lost you), if history does
indeed continue to repeat itself, then the suggestion is that we could see
movement something like this…our first target is a 2.85% 10yr note yield. But first, NOTICE THE NEXT MOVE IN REPEATING HISTORY IS YIELDS MOVE HIGHER.
The intense volatility that could be just around the corner
would logically coincide with the termination of QE2, and yields would once
again move lower to test all time lows in the 2’s. Possible?
Yes…. Probable? No way to know, but we’ve talked enough about
history repeating itself that we wanted to give you one of the frameworks for
looking at and thinking about it, as well as some context as to what it might
mean if it continues to happen.
For now, today’s Employment situation report amounts to the
best piece of confirmation so far for the validity of the 2 month rally that
began in early April. Volumes have been
astonishing in Treasuries this week and have finally reached levels where
secondary managers have begun hedging with 4.0 MBS in greater numbers than 4.5’s. That means that 4.25 Best-Execution rates are
a real possibility in the near future, to whatever extent that something unforeseen
doesn’t reverse the present trends in the market.
This is the guidance we shared with consumers today…
CURRENT GUIDANCE: With “The Wall” now torn down a path has been
paved for mortgage rates to continue improving. An extended rally will
not come without setbacks though. Short-term corrections are to be
expected along the way. That means borrowers who
are working on a shorter lock/float timeline should remain defensive.
Your main goal is to
protect new, lower rate quotes from short-term market fluctuations,which
could happen as early as Monday and last all week. The overall bullish
trend is very much in tact though. Intermediate to longer-term scenarios
are more than justified in floating.
Have a good weekend folks.