We talk about MBS having a tendency to lose ground at a gentler pace than Treasuries when bond markets in general are weakening. This "spread tightening" has been seen to some degree over the past two days as 10yr notes have endured a mild losing streak. This isn't too severe and almost imperceptible as a "losing streak," especially when one examines the shorter term charts, like the one day chart below which includes S&Ps. 10yr yields did hit the 3pm close near their highs of the day, but selling in stocks helped yields work their way back under 2%.
Why did yields stop there? We think the following trendline is in play. Yes there are a few breaks in the chart below but notive how this morning's break seems to hone in on the trendline in a series of narrower and narrower bounces. Often times, breaks of trendlines will do just that, essentially forming mini short term triangles with an apex on the trendline as if to say "we're thinking about breaking this trendline right now!"
If that's not good enough for you, let's take a farther look back. The ledge of yields on the 9th followed by a steep drop is a significant indicator of a technical TEST and BREAK. In other words, when the line on a chart starts grinding around a trendline and the next move is a big swing in one direction or another, that reinforces the significance of the trendline. We see the same thing on the 6th, but with a rejection of lower yields, leading a pronounced bounce higher. FYI, we threw in a competing bullish trend that has provided support leading to "lower highs" all month.
This is all well and good for Treasuries, but what's the point for MBS? Essentially, it looks like Treasuries are at risk of bouncing again on this lower trendline and testing the support at the upper line if tomorrow's economic data doesn't get yields to break lower. Whether or not domestic economic data is capable of such a thing is sort of a "wait and see" scenario as it's hard to quantify how much of the recent bullishness is owing to the situation in Europe. We're hopeful that even if Treasuries weaken, as long as the weakness is only moderate, MBS have a decent chance to continue to hold recent support levels which have begun to look like "concrete floors" as opposed to the concrete ceilings discussed last week.