Did Bonds Lose Enough Today To Be Hoping For Support Tomorrow?

By: Matthew Graham •
  • MBS close at 100-07, down 8 ticks on the day
  • 10yr TSY 2.7bps higher yielding at 3.77%, well above 3.71% intraday low yield
  • Secondary Market Current Coupon: 4.472. +3.2bps on the day
  • "Rate Sheet Influential" Yield Spreads Wider
  • About $2bn in Originator Supply today. MBS trading volume still below average
  • Stocks up modestly. S&P +0.23% to 1208
  • Today's losses paint certain technicals in a different light

For the sake of not cluttering up the post too much with another paste-job of previous charts, if you want to see the evolution of the charts, just pull up the last post.  Now, in several cases, prices have fallen (or yields have risen) enough to suggest that SUPPORT is actually a possibility as opposed to the RESISTANCE we discussed yesterday.  Some charts disagree, and some still look pretty bearish.

Discussion on the following chart:

Here are MBS and Treasuries through most of April.  Both have been in trend channels.  Last night the "resistance" lines (upper line for MBS, lower line for treasuries) suggested the rally could be facing challenges today, and so it did.  But today, each has moved enough that the opposite lines ("support") may make the opposite suggestion!

In fact, if we didn't have any other charts to consider, the suggestion would be pretty clearcut that further losses would be minimal and maybe even unlikely! 

Other charts muddy the picture a bit...

Chart Discussion:

In the following chart, we're looking at the same two markets over a longer time frame.  Almost completely opposite suggestion from previous charts.  Here we see MBS putting in it's first "high" that has been lower than a previous high and potentially contending with the cement-like resistance at 100-16.  Similarly, treasury yields have resistance from both the diagonal trendline and from a horiztonal line at 3.75.  Nothing rosy about either chart.  1-1...  how we gonna break this tie?

Chart Discussion:

Of course if "breaking that tie" was that easy, we wouldn't waste your time giving you charts to consider!  We'd just tell you what was going to happen.  So the following chart of 10yr Treasury futures is a bit tricky. 

Arguments could be made that we did not "probe through" the upper red line this morning, but rather, bounced off the upper dotted yellow line.  This also lines up with the lower dotted yellow line to form an upwardly sloped trend channel as opposed to the flat one. 

If it's upwardly sloped, we're actually at support right now and stand a chance to bounce here.  If it's horizontal we could fall a bit more before getting into meaningful support.

This final chart just zooms the previous one out so you can see what's going on in a larger context and includes somewhat of a thesis. 

Here's another: to whatever extent technicals were helpful in anticipating today's sell-off, they are now suggesting uncertainty ahead and even a potential bounce back in the other direction as early as tomorrow.

The answer to the question I posed in the title of this blog: YES

While short term technicals led rates back toward a test of support levels today, longer term bullish technicals still outweigh short term bearish arguments. If you were basing your entire lock/float decision on that...floating makes more sense. We target another test of 3.71%. If attempts to break 3.71% fail, we will be forced to re-address short-term bearish argument.

THE BIG PICTURE PERSPECTIVE OFFERED IN THIS POST STILL APPLIES THOUGH. 3.71% STILL LOOKS TOUGH TO BREAK. Makes you feel like the month long rally we've enjoyed is due a trend reversal any day now.

Stay Defensive. GUTFLOP