We all know that when you squeeze an orange, orange juice comes out.  But what happens when you squeeze mortgage backed securities?  Well, we may find out finally this week.

Mortgage bonds remain trapped in their “squeeze play” as the 100-day moving average has been tested three (3) times last week alone and each time has clobbered MBS pricing back down.  Last week also saw mortgage backed securities drop and test their support levels as well, that of the 25-day and 50-day moving averages, which held.  But the two are coming closer together every day and eventually one will have to break and we will see what happens when you squeeze MBS in this market.

Last week saw mixed data when it comes to mortgage bonds.  We saw continued signs that the consumer is feeling better, the housing market is getting better, but inflation remains tame.  While the housing market does appear to be beginning its rebound, it is questionable as to whether or not it is sustainable due to incentives currently provided.  When the incentives are no longer available, will the market crash again?  Or will it truly be recovering?  And what about inflation?  We all know it is coming, it is just a question of when, and mortgage bond traders feel the same way.  So while data is what it is now, traders are also thinking about where it will be in a month or two.

And that leads us into this week.  OK, it is not a month or two down the road, but we do have some key data on the schedule this week, starting with today’s Chicago PMI.  Later, we will see a lot more data that will likely squeeze mortgage backed securities to the point of bursting out, including the Jobs Jamboree on Friday.  Take a look at what we have going on this week…

• Monday:  Chicago PMI (9:45), 3-month T-Bill (1:00), 6-month T-Bill (1:00)
• Tuesday:  ISM Manufacturing Index (10:00), Pending Home Sales (10:00), 4-week T-Bill (1:00)
• Wednesday:  MBA Purchase Applications (7:00), ADP Employment Report (8:15), Productivity and Costs (8:30), Crude Inventories (10:30), FOMC Minutes (2:00)
• Thursday:  Jobless Claims (8:30), 30-year T-Bond Announcement (9:00), ISM Services Index (10:00), 3-year T-Note Announcement (11:00), 10-year T-Note Announcement (11:00)
• Friday:  Nonfarm Payrolls (8:30), Unemployment Rate (8:30), Average Work Week (8:30), Hourly Earnings (8:30), Treasury STRIPS (3:00)

As you can see, there are a lot of reports that are boldfaced this week, which means a lot of volatility may be seen and a good chance that MBS pricing will break its trading range this week, finally allowing a solid look into the future.

But which way will mortgage bonds break out?  Looking at the charts doesn’t even paint a solid picture right now as there are both positive and negative signals.  Stochastic indications allow room for movement higher, but they are on the edge of the overbought spectrum.  We already discussed the fact that the 100-day moving average and the 50-day moving average have both held their ground and “framed” the trading range.  On the support side, you also have the 25-day moving average just above the 50-day, so it is essentially a double support layer.  On the top side, the 200-day moving average has moved higher, farther away from the 100-day moving average, so in a sense, the 100-day MA would appear the weaker side, especially if MBS pricing gets  a bounce off the 10-day MA like they have been having lately.

The bottom line is that this week is yet another day-by-day call on the lock/float game, though the risk/reward ratio still favors locking.  That being said, there is a very good chance we are going to see mortgage bonds make a breakthrough this week and provide stronger clues as to the future of mortgage rates.

Tagged as: MBS Commentary, Mortgage Rate Forecast