Just like early June, we're once again forced to consider that several weeks of upward movement in yields means the lows are behind us for now.  Just like early June, there are reasons to doubt that and reasons to fear it.

On one hand, we could make a case that the bond market will experience ongoing and indefinite support due to the potentially permanent economic changes associated with coronavirus.  Chief among these is the potentially permanent destruction of jobs--not the ones that return if covid is mostly defeated, but the ones that aren't coming back--either because companies realized they can live without them or because companies have gone out of business, leaving power to consolidate in the hands of fewer, bigger companies.  Additionally, there's the risk that winter months and premature attempts at reopening result in a resurgence of covid and ultimately reinstated lockdowns.

On the other hand, the more money the government and its bankers continue throwing at the problem, the more difficult it will be for yields to drop back toward all-time lows.  In fact, if the Fed is indeed successful in stoking inflation to the point of pushing a 2.5% ceiling (in terms of core annual PCE), longer-term rates will be heading higher, even if the Fed funds rate remains at 0-0.25%.  Fortunately, there's a healthy amount of skepticism about their ability to do that--not to mention the fact that last week's changes weren't actually changes in policy--just a heads up that they are willing to leave those policies intact for longer than past precedent suggests.  If one prong of that policy is bond buying, the negative implications for the bond market are offset to some extent. 

Either way, on a purely technical note, massive, sustained rallies in bonds will always give way to rebounds and corrections at some point.  We may be looking at a big picture rebound with early August marking long-term lows, or this may be a gyration as rates continues bouncing around in the basement.  All we can do for now is defend against the negative possibilities and track the current threat until it's defeated.  That's actually as simple as the yellow lines in the following chart (for now).  

One saving grace for the mortgage market is that our rates need not rise as quickly as 10yr yields for the same reasons they were not able to fall as quickly in the spring.  In other words, mortgage rates were already extremely high compared to Treasury yields.  This allowed mortgages to sustain much less damage last week (especially with the added benefit of the LLPA delay).  The spread between the two is still elevated, so the trend of outperformance has some room to continue if Treasuries continue selling off.  For those wondering if this is an MBS-related issue, it's not.  If we compare mortgage rates to MBS, we're even farther away from historic norms.

While there's no significant data on tap today, the rest of the week brings several important reports, with at least one on each of the next 4 days.  Nonfarm Payrolls are expected to remain in positive territory on Friday and the unemployment rate is predicted to move below 10% (currently 10.2 and forecast to drop to 9.8 this week).