• Is it time to freak out?
• No, not yet

Bond yields are at long term lows and that's both exciting and scary.  It's exciting for obvious reasons (most people like low rates), but scary because long term lows, by their very definition, occur just before a bounce toward higher rates.

The trick, of course, is to determine when we're seeing such a bounce (as opposed to mere "volatility on the way toward lower rates").  The other trick involves deciding when a bounce has gone from simply confirming the end of the previous trend to suggesting the beginning of a new trend toward higher rates.

In most of the following historical examples, we can see a similar theme with respect to the aforementioned "tricks."  Identifying the "bounce" requires either time or a sufficient weakness.  The suggestion of a new, weaker trend requires a break of the previous long-term low OR a RANGE of yields centered on the previous low.

I bring all this up because yesterday--more than any other recent day--suggested that the long-term lows in bond yields are running into resistance.  Add to that the fact that technicals are beginning to suggest a bounce and it makes sense to think about playing defense.  But in the biggest of pictures, we'll see in the examples below that this sort of weakness is sometimes part of a broader "bottoming out" process in rates.  Sure, it COULD be a bigger bounce.  It could also simply be a pause on the way lower.  Both options begin the same way and we haven't seen enough of a rise in rates over the past 48 hours, nor have we allowed enough time to pass in order to conclude that the current bounce belongs in the same league as the previous examples.

All that having been said, I'm still feeling defensive, simply because I think the Brexit effects have been overdone in terms of market preparation, and because of the difficulty lenders are facing in passing gains through to rate sheets at current levels.  Defense makes sense.  If defense ends up being the wrong call, it will involve the opening up of new liquidity in lower MBS coupons and none of us will care about having leaned too far toward locking at current levels.

Here's the chart: