3.27 and 3.30 have proven to be pivotal technical price levels in 10yr tsy yields. After rallying last week, all eyes have been on these levels to see if we could hold our ground in these lower yield levels. Today marked the first real test of 3.27 as a ceiling and as you can likely see, we remain lower both at 3pm booking and currently. Just because that's the case today is no guarantee it will be tomorrow, but to see the bounce occur precisely at this level reiterates the technical significance, thus suggesting continued vigilance whenever yields threaten to move higher.
MBS also have their own technical level in 101-07+. This level was the subject of the only real bearish slide before the summer months. Additionally, that sell-off was a significant outlier from the surrounding trading which was characterized by tight ranges, stability, and boredom. Those months of March, April, and May marked only the 2nd time MBS have crested 102 and operated close to that level than to 101-00. The last few days would be the third such time, and I'm sure we'd all like to see it be just as stable and extended as it was in the spring. What is the liklihood of such a thing?
Different World
Things are quite a bit different now... In the spring, uncertainty about the recovery and about massive debt supply as abundant. And though plenty of both still exist, the recovery sentiment not only came into existence, but has gone so far as to stoke unprecedented equities rallies. To make matters worse, the concerns over supply in the treasury market has not experienced the same sea-change as the notion of the overall economic recovery. It seems that for every time that speeches on monetary policy, inflation data, or noticeable demand for US debt take steps to exorcise these demons, another "headline snowball" ramps up speculation, gold prices spike, and Peter Schiff starts getting air time on CNBC again. I'm not saying this is right or wrong, at least not for 20 more years or so, but I do know one thing: it makes life tough for bonds.
Most recently, the "headline snowball" in question centered on several seemingly overnight occurrences including but not limited to Australia raising it's benchmark rates, concomitant weakening of the dollar, broader concerns about currency in general, which in turn contributed to a massive rally in gold, which somehow got read as indicative of inflation panic, which put the focus right back onto the easiest target of the day: the tsy auction.
Ok, maybe everything isn't in quite the right order there, but you get the idea... Bonds suffered a bit ahead of the auction. But after going off slightly better than expected, markets showed their hand with the bounce at technical price levels and we live to fight another day.
Bringing this full circle though, how can these day to day happenings inform the bigger picture questions posed above?
Of course with some of the fundamental changes set to occur in the MBS world specifically, "stable and extended" are two words that will likely elude the definition of any price movements around 102-00. That doesn't mean things have to be outright negative for bonds, but it might mean they have to be fairly negative for stocks... With another raft of earnings coming up (Alcoa tomorrow for instance... The single most important stock for the MBS market ever!!!*), there are some dependencies on big unknowns.
Continuing with that theme, the very nature of the bond market's challenges today--challenges we will continue to face so long as we wish to remain in high price/low yield heaven--very logically suggests a continued microscope on tsy auctions. And what could be more quintessential than a reopening of the mighty 10 yr tomorrow? And you guessed it... another dependency on uncertainty. The world wants to clamor about the US being a laggard of monetary policy change? The dark brotherhood of analysts and economists that bide their time biting their forked tongues on the topic of inflation want to send up the dark mark and emerge from their hollowed out tree stumps and caves in unison on an ostensible whim? So be it..
Maybe I too will one day start seeing something NEGATIVE about the INTENTIONAL inflationary pressures brought on by QE... Maybe rates will have "skyrocketed" to 5.5%... But until then, the question of our continued enjoyment of low rates will be entirely dependent on any little (or big) piece of data that speaks to something seen to be at or near the core of the "problem." In other words, it's always likely that rates can remain low and stable to whatever extent tomorrows auction goes off better than expected and to a lesser extent, that the stock lever remains un-tweaked by earnings.
Wait a minute... Am I saying that technical, range-bound price movements in bonds are losing a bit of prominence in favor of a reconnection to fundamental data and the stock lever? I guess so...
*Inside joke. We don't really mean that about Alcoa. The only time I've ever really cared about Alcoa is when I found out the other day that they pioneered an Aluminum forging process that's used to make the wheels for the new Lamborghini SV...
MBS Market Alerts
