The Day Ahead: Lightest Day of Data Leaves Most to Chance


Tuesday is the last day of the week without a major potential tape bomb on the economic calendar.  Thursday is arguably in that same boat, but seeing as how it’s sandwiched in between a hefty data day containing ADP employment numbers and NFP Friday, we’d say Tuesday is the last day of the week before the fun begins.  This assessment is largely dependent of what your definition of “fun” is. 

So far, the fun has been mostly predictable for Treasuries in that they’ve certain stuck inside the highs and lows set on FOMC day.  That’s legitimately fun when we consider supportive bounces around 2.20 and 2.18, but less fun when we consider that 2.07 has been a rock hard floor as yet, with 2.087 playing the gatekeeper role (2.136 is more of neutral mid-point so far):

Here’s another pleasure/pain paradox.  While it’s pleasurable to know that financial markets can be relied upon to form regular trends at times (thus alerting us to changing momentum when trends are broken), it’s painful when trends are moving in this direction:

It was particularly painful on Monday, to have seen the above trend LOOK like it was set to be broken (something that isn’t much outside the realm of possibility) only for yields to pop back inside with the afternoon sell-off.  But the pain in Treasuries was tolerable, at least, whereas that in MBS markets was nauseating.  In fact, MBS have been trying to digest several Fear Factor meals in both the short and long term.  As you can see in the chart below (10yr Treasury PRICES vs MBS prices — so they move in the same direction) MBS, in red, had been hangin’ in with Treasuries fairly well before Bernanke’s testimony and FOMC Minutes on 5/22, but began to get queasy later that afternoon and especially the morning after.   

The 28th was a long, awful day for both sides of the market and MBS thought the worst might be over as the following day progressively strengthened (29th).  Then the first bounce on the 31st followed by the 2nd bounce today, and MBS lost it.  At least viewed in this context, we can stretch our imaginations and consider that it’s MBS, not Treasuries that have experienced a more linear “double bottom,” and whereas Treasuries were willing to move into slightly stronger territory from recent lows, MBS have been anything but eager to come up out of the sewer.  This is very much a “fool me once” moment with respect to May 29th-31st (in that MBS likely would have stayed tight if Treasuries didn’t hit resistance Friday and Today, maybe… possibly…  hopefully…). 

Leave a Reply