There are a few things working against bond markets at the moment, not the least of which is the fact that they’ve rallied rather ferociously earlier this morning and are showing signs of tiring. But like the rally itself, those “signs of tiring” have more to do with what’s going on in correlated markets as opposed to bond markets themselves. In other words, if the proper cues were given from stocks, the Euro, and European bonds, then US Treasuries and MBS might not look so exhausted.
But as it stands, the aforementioned ‘usual suspects’ are doing more to put up road blocks for advancing bond markets as opposed to waving them through recent resistance levels. The Euro saw it’s lowest bounce of the day around 12:30pm New York time. Surprise surprise, so did stocks. That rebound in “risk-on” (and believe us, we use the term ‘rebound’ very loosely) has translated to a bit of momentum for stocks and a bit of sideways indecision for bond markets.
Basically, the cues are not presently there for bond markets to keep on rallying. The 5yr Auction was mostly a non-event, but wasn’t a net-positive for longer-term yields. Perhaps the biggest consideration at the moment is that the Fed is buying (scheduled “twist” buying) 6-8yr Treasuries at the moment, which we’re tempted to credit with keeping the mid-to-long end of the yield curve a bit better-sponsored than it otherwise might be.
While we certainly can’t predict or know what will happen at 2pm when that buying is done, we are quite interest in what markets do at that time, if anything. If stocks and the Euro continue to recover, and Treasury yields continue holding some sideways ground at current levels, we could be looking at the best levels of the day as a thing of the past. Then again, a Euro-zone official might say something interesting that counteracts any of this potentially pent-up negative energy.
Either way, we’d keep an eye on an MBS pivot at 104-14 in Fannie 3.5’s, and are especially interested in how it’s doing in about 25 minutes from now. If prices fall decidedly lower, lenders would likely be considering negative reprices with a break of 104-12. In other words, a break below 104-14 means it’s time to pay closer attention, and a break of 104-12 would warrant an increasing level of concern.