Greek-Driven Flight to Quality Tempers MBS Rally

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A familiar scenario played out overnight and through the trading session.  It goes like this: new information comes to light about the potential for a Greek default, and the result is a big stock sell-off and an even bigger Flight-to-Quality (FTQ) rally in Treasuries.  Despite today being the first day of renewed Fed Buying efforts, MBS just can’t keep pace with this level of demand for Treasuries.  The technical level at 103-06 turned out to hold as resistance for a majority of the day.

Of course the Fed was buying more than just MBS today with 2.5 bln going to the 25-30yr section of the yield curve (indirectly benefitting the 10yr as well).  Combine that with the Flight-to-Quality rally and 10’s moved sharply lower.  It might seem like the rally was simply “aggressive” without much rhyme or reason, but viewed in the context of the trend channel that I can’t seem to stop bringing up and it almost looks “intentional:”

Stocks are in scary territory… The SP lost over 30 points today and closed under the following trendline for the first time since July 2009. 

If stocks keep falling, we could be talking about a slightly different trend channel in 10yr notes fairly soon, one that would see yields closer to 1.5 percent.

Bernanke is tomorrow’s scheduled headliner, speaking to congress on the economic outlook and monetary policy responses at 10am. That time slot is shared with a report on Factory Orders, but no one is expecting to care much (especially if today’s reaction to economic data is any indication). 

Apart from Bernanke and ongoing “Twisty” trading from the Fed, the fact that Greek-driven speculation has 10yr yields and stock prices close to annual lows, leaves the door wide open for more volatility, either from news that exacerbates or moderates the situation. 

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