Sideways Morning In Bond Market. Technical Inflections Outlined

A moderately weaker benchmark bond market has led the new front month delivery FNCL 4.5 MBS coupon lower this morning.

The net effect is 4.5's are hovering around 102-00, down from 102-17 yesterday. This does however include the 8 tick monthly roll discount. When focusing just on February delivery instead of front month vs. back month, the FNCL 4.5 MBS is only down 10 ticks, effectively tightening the spread to benchmarks. NOTE: the roll was already accounted for in loan pricing. EXPLANATION HERE

On the whole, rising interest rates are not surprising on a day that holds a "rate sheet influential" benchmark Treasury note auction. The move lower in price was immediate on the open. Since then MBS have been flat flat flat....

With about an hour left before the auction, and with most of the recent movement in treasuries adhering rigidly to a defined technical framework, let's take a look at where the fox may run when flushed from it's morning burrow (3.40-3.42).

The chart below highlights several recently pertinent technical yield levels.  Note that 3.40 had been supportive this AM until recently.  After it broke, this was a potential early indication that an additional concession would be built in before the auction.  But with yields bouncing off support just slightly higher at 3.42, we view this as an indication of a more balanced stability in lieu of a bigger move above 3.42 in the next hour. 

For the most part, the current yield levels in 10's have served as support more than resistance over the past few days.  There's no clearcut support for weaker yields until 3.46 if 10s break 3.42%, which is then followed by 3.50 and (not shown on chart) 3.56.  On a well received auction, expect 10s to immediately test 3.37.  If that breaks, yields will be back in a "noisy" range down between 3.28 and 3.32%. With no clear winner as far as a favorite technical target. If 10s do run through 3.42% and do not correct quickly...reprice risk will increase greatly.

re: the $21 billion 10 year note auction.

We are encouraged that 10s have held 3.42% despite a rapidly rallying stock market. We are hoping this relative stability illustrates pent up bond investor demand. 

"When Issued" 10s currently bid at 3.415%