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MBS Day Ahead: Bonds May Not Decide Much Today, And That Would be a Good Thing

June 16, 2017
by admin

Bond markets may not give a stellar performance today, offering resounding confirmation of an ongoing rally. Conversely, they’re not likely to rise enough to raise serious questions about an ongoing rally.

When it comes to getting a sense of potential outcomes for the immediate future, there are 2 things I would keep in mind today. One of them is omnipresent and the other is specific to the current situation.

Omnipresent: if there were a good way to know what the next few days of trading would look like in any given market beyond a reasonable doubt, everyone would trade accordingly. Of course, not everyone can be a buyer at the same time or vice versa, so markets would “break” and the trade that looked like a sure thing would be at risk of a paradoxical reversal. In that sense, it’s actually a good thing to see some balance in the force after Wednesday’s big rally.

Current Situation: to dovetail on the point above (i.e. “good to see some balance”), yesterday’s bounce back was far from heart-breaking. In fact, yesterday’s closing levels were the lowest “consecutive close” of the year (a level that bonds have close at or below for at least 2 days in a row). Technicians would refer to this as a “confirmed” level. In other words, Wednesday’s break below 2.17 was a “test,” just like the tests seen on 6/6 and 6/2. In both those cases, yields were back above 2.17 the following day.

2017-6-16 open

The bottom line is this: considering that we’re beginning the day in slightly stronger territory and that yesterday was the first time all year we’ve seen a consecutive close under 2.17%, we’re far from giving up hope on a broader move toward lower yields. That doesn’t mean we shouldn’t be cautious or defensive if markets shift to suggest it (or simply for risk-averse clients). But they definitely haven’t suggested it yet.

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