High Trading Volume Confirms Recent Gains. Is Bond Rally Made of Glass Though?

By: Matthew Graham •
  • Fannie 4.5's are up 7 ticks at 100-28
  • 10yr yields are down 7-8 bps hovering around 3.62 to 3.63
  • Stocks are experiencing their single biggest day of losses this year with the S&P down 2.36%
  • At just after 1pm eastern, volume in 10yr futures just passed volume totals from 4/30, a healthy day in it's own right.

Converging, narrowing, coiling, consolidating, flagging, pennant-ing, orbiting, etc... 

Call it what you want, but after breaking into yet more positive territory, both sides of the bond market are putting in higher lows and lower highs as the day winds down.  It's a fairly mathematical dance that we've come to almost expect on NFP weeks, even if the bullishness is a bit unexpected (in a good way).  How important are these moves and this volume?

Well, the volume is a huge boon to the validity of the gains.  It certainly seems like MBS is getting more comfortable above 100-16/18.  And it that sense, it's a "confirmed breakout."  BUT!  and that's a big "but," and I cannot lie...  Treasuries are merely CONTINUING a pre-existing trend, albeit aggressively. 

THIS IS IMPORTANT....

Is that bad?  No, not in the slightest, but it's just not the same kind of "breakout" we're looking at in MBS.  FURTHERMORE, we have to remember WHERE the volume is coming from..  In this case, some potential reconcilable sovereign debt concerns.  Granted, this time around it seems that markets will not be so readily soothed with IMF bailout talk, but remember Dubai.  There was plenty of the same "back and forth" we've seen with Greece, but eventually the FTQ bid was clearly present--and it clearly exited as the Dubai concerns eventually faded from prominence. 

It's not necessarily going to be the same way with Greece and the Eurozone, but risks of similar eventualities can't be ignored.  In a way, tempering the optimism in this way is a great thing as it allows for the normal converging highs/lows ahead of NFP and then reconnects the market with THE top shelf econ data item on Friday.  Well, I guess volume will tell us how much the market is willing to trade econ vs. headlines assuming there is no headline drama on Friday morning or before.

With treasuries being, as they are, in a downtrend, our vigilance grows stronger with each passing adherence to the cycle.  The trend channel has to break some time.  The goal is not to predict when that will happen, but to know it when we see it.  Still, there's no harm in identifying upcoming events that might serve to break the channel.  This Friday is one of them.  Until then, it would take some pretty intense schedule econ deviation or unexpected headline to nudge bonds away from their current holding patterns with MBS between 100-16 to 101-00 and 10yr yields 3.6 to 3.72 (ish). 

(oh, also!  just because we're talking about trends "breaking" doesn't mean a "bad break" for bonds.  (it probably means a "bad break," but it's not out of the realm of possibility to see a good break as well--one in which the stock market skies begin falling, volatility spikes, and Roubini's get more air time on CNBC.  The stock chart below forces us to at least ENTERTAIN the possibility that stocks might be doing something other than it's standard issue freight train rally).

The S&P hasn't made 2 consecutive new lows since beginning the 2010 uptrend.