MBS RECAP: Volatility in a Narrow Range

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For all of the apparent drama and volatility experienced during the past 2 weeks, it’s easy to overlook just how narrow the range has been.  There’s no simpler way to say it than this: for the 8th straight day, 10yr yields closed between 2.375% and 2.42%. 

Today saw yields push the higher end of that range, with a 3pm close of 2.41 and intraday highs of 2.425.  It’s also fair to say that the bias inside the range has been negative–at least if we’re looking at the past 3 days.  During that time, we’ve seen a decided trend of “higher lows” in intraday yields as well as other “risk-on” indicators like stocks and Yen/$.

In addition to that general “risk-on” trend, today’s bond market weakness got a boost from a decent Q4 GDP report.  This was the “final” version, and thus the one that will dictate next quarter’s percent change.  With that in mind, today’s 2.1% gain versus the 2.0% forecast is pretty ideal for bond bears.  It’s technically still “a beat,” but it sets a low bar for Q1 data.

In addition to the headline growth considerations, the internal components were on the strong side.  Both business investment and consumer spending advanced, and inventories didn’t account for a big portion of the headline (which would make it easier to naysay the data).

The early bond market weakness following GDP contributed to the sense that bonds were bouncing at the lower end of their longer-term range.  Even though that range has intraday lows closer to 2.30% (in 10yr yields), 2.37% is actually the lowest “confirmed” close (i.e. the lowest level that yields remained underneath at 3pm for 2 days in a row).  In other words, rates weren’t necessarily too high earlier this week for today to mark an ongoing effort to move back into the longer-term range.  That said, we’d need to see a firm break above 2.42% before counting those terrible chickens.

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