MBS Day Ahead: Looking at The Rally With Science vs Psychology

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Posted To: MBS Commentary

"Science" may not be exactly the right term, but let's look at the recent bond market gains under an objective microscope. In so doing, we will see there is more room for optimism than the psychological approach might suggest. But first, what exactly do I mean by the "psychological approach?" Simply put, we have a tendency to view bond rallies (or sell-offs) as being somehow more limited if they are pushing into levels not seen in a long time. In the current case, rates have fallen quite a bit and are at the lowest levels in a long time. From a psychological standpoint, this makes us think additional gains are somehow limited. If we instead view the rally through a few mathematical lenses, we can see that there could still be plenty of room to run compared to the most...(read more)

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