After a Lackluster Morning, Bonds Breakout. Spreads Wider

By: Matthew Graham •
  • 4.5 MBS reversed course. now up 3 ticks at 100-02
  • yield spreads widen into rally on money manager profit taking
  • 10yr notes just slightly positive on the day now with yields at 3.88
  • Stocks still up on the day, but off the highs
  • No fundamental motivation?  Why the spike?

Couple significant technical events in the past hour...  The charts make it look as if the market reacted to a specific news or econ item, but so far, nothing along those lines has stepped forward to claim a causal relationship with these gains other than the technical thoughts that follow below. 

Starting with the 10yr note:


The red line shows a two day trend of higher lows.  the breaking of this trend line, followed by a 'test' of this line suggests the move back to 3.88 that we've seen.  However, 3.88 itself is also technically likely to provide resistance to further gains.

With the improvements in tsy's, MBS get to come along for the ride, but likely not nearly as fast. That touch of the intraday high followed by a quick dip was money manager profit taking.

The other technical story is in 10yr futures.  Here's a shorter view:

115-25 was a FIRM floor yesterday afternoon through this AM, but 115-19 was an equally firm floor this AM in moderate volume (overall, volume is low, but the tests of 115-19 correspond with the highest volumes of the day).  Once 2 tests of 115-19 failed, where else to go but back into the previous range?

But are these levels significant in the longer term?  Let's take a look, and extend both the red lines above back to the beginning of the year

Oh boy howdy!  only 3 days this year have 10yr futures closed under 115-19.  115-25 is more pertinent in the last two days than the long run, but there has been a fair amount of action around there in late march/early april.

Long story short, the technicals have taken a bit of a down day and turned it into a sideways day... 

If we were forced to chalk up this recent somewhat abrupt move in bonds and MBS, we're only seeing one viable candidate: Greece. Earlier today, some weakness in bonds was attributed to increasing clarity on the Greece picture. So with news coming out around 12:40 that the ECB declined to comment on it's role in deciding the size and maturity of emergency loans. So this was potentially a step backward in the optimism that helped stocks and hurt bonds, and the AM weakness was simply and abruptly "unwound" right back into the previous range.

We'll let you know if volume or movement increase to the point things might change, but reprices for the better are possible for now.