MBS Still at Best Levels. Recent Past Suggests Not Much Higher

• FN 4.5's up 7 ticks to 101-02
• 10yr Tsy Yield down 3bps to 3.66
• Both those levels are recent technical resistance against further improvements
• Stocks also at resistance from 2 out of last 3 closing levels
• Fed Speak later this afternoon, but weekly focus decidedly on auctions ahead

Here's a chart of the past few sessions of Fannie 4.5's (MBS).

At their best levels, prices were buoyed by the 101-02 level, and even the limited cases of dipping below that line were immediately preceded by a test as support (aka prices "bounced" there before moving lower).  As we often discuss, from a technical perspective, if a certain line has acted as support (like a "floor"), once it's broken and prices move lower, that same line now has the tendency to act as resistance (think "ceiling").  From the afternoon of the 18th through this very moment, 101-02 has been playing that role of resistance-provider quite well.  So although we're at the highs of the day in quiet, stable trading, this is at least one suggestion that further upside potential is limited.  What can other markets do to confirm or refute this?

From MBS, the next usual suspect for piecing together our sense of the markets is the treasury market, namely the 10yr note.  Here's that chart:

There are a couple things going on here, so I tried to make it more tangible with the color coding.  On both the 18th and now today, we've seen yields approach the 3.68 level only to bounce against technical support (remember that "support" looks like a "ceiling" on a yield chart as it moves inverse to PRICE.  So as yields move UP vertically, they would encounter support and as they move DOWN they would encounter resistance).  That support is indicated by the teal circles.  But the room for improvement has been largely capped by 3.66 for the past 3 days (white circles).  Indeed, after yields rose above 3.66, they were only ever lower than that for less than 20 minutes on Friday, with many more cases of firm bounces followed by movements higher.  And it's that 3.66 level that seems to be putting a floor on gains today in treasuries. 

Even if yields were to struggle lower, the fact that the morning of the 18th saw 3.65 act as firm support and combined with mid-day Friday, that the same level acted as resistance means this would be the next opportunity for treasuries to pause and potentially rise in yield before any further gains could be had.  All this is a bit moot as volumes are low, data is null, and the most important events of the week as far as interest rates are concerned, are yet to come in the form of the treasury auctions.  Those begin tomorrow with the 2yr note, as well as our first real dose of data in the form of existing home sales.

In the absence of data, the stock market can sometimes serve to suggest direction for rates.  But the picture is far from clear there.  If you remember on Friday that both stocks AND bonds lost ground together (move to sidelines aka CASH), it wasn't at all unlikely that stocks could gain in tandem with bonds today, and that is indeed the case.  But stocks are also pausing at a rather technical level suggested by recent closing highs around 1166.  In this last hour and a half of stock trading, any decided move in one direction or another could exert a bit of  'lever" effect on bonds (stock prices up = bond prices down), however, that remains subject the to idea that "volume is low," thus allowing for few if any conclusions to be drawn.

And so it goes when we wait for more important days in the near future: current trading may follow a certain general framework, but it's all akin to a pre-game warm up as the real action won't begin until 1pm tomorrow--when the first round of auction results are released.

Reprices for the better have been reported