How High Are Those Eyebrows?

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Stop me if you’ve heard this one before.  Here’s a formula for one of the ways bond markets move: Rates fall based on a particular risky eventuality.  While that the likelihood and the impact of that eventuality is being assessed, the rally continues.  As soon as more dire outcomes start getting checked off, yields begin to move higher until the the rally is mostly erased.

That’s a pattern that plays out time and again in bond markets.  Most recently, it has played out with Italy and European political risks.  With the confirmation of Italy’s new government fully finalized as of yesterday, it’s no great surprise to see bonds back in line with the sideways range that existed before Italian drama began.

The unfortunate reality of this move is that it hasn’t even come close to being bad enough to suggest its own support.  In other words, when sell-offs cover a certain amount of ground over a certain number of days, technical studies will increasingly suggest a ceiling for rates.  Some of these studies label such ceilings as “oversold” levels.  In the current case, there quite a bit of room to run before hitting those oversold levels.  On an even simpler note, yields are flirting with 3.0% today when we have plenty of recent evidence for a range that extends above 3.10.  

Let’s give recent events some credit, however, for raising some eyebrows about potential risks in the future.  Sure, if Italy never happened, we would certainly want to include the recent long-term highs as the top of the current range.  But Italy happened, and although the situation is defused, those bigger-picture risks are more like a dormant volcano as  opposed to a dead one.  As such, I’m more inclined to see the top of the near-term range around 3.04%.  By “near-term,” I’m referring to the few remaining trading days before next week’s Fed announcement (Wed).  

As for the bottom of the near-term range, I’m less convicted.  I have it set at 2.94% in the chart above, and while I do feel like a break below that would be informative, it wouldn’t be as informative as a break above 3.04%.  The latter would let us know that bonds are ready and willing to continue pushing the pace of the long-term selling trend.  The former would essentially just add emphasis to eyebrows we already assume are raised. 


MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

MBS

FNMA 4.0

101-18 : -0-01

Treasuries

10 YR

2.9754 : +0.0004

Pricing as of 6/7/18 9:31AMEST

Tomorrow’s Economic Calendar

Time Event Period Forecast Prior
Thursday, Jun 07
8:30 Jobless Claims (k) w/e 225 221
8:30 Continued jobless claims (ml) w/e 1.738 1.726



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