Benchmarks Breakout of Bearish Trend Channel. MBS Outperform

Earlier today  we said "on a well received auction, expect 10s to immediately test 3.37," and that is really the story of today's post-auction bond market. 

10's continued to trade around the 3.37 level, but just like we were encouraged by price action before the auction, we're also encouraged by the technical signals seen in the hours following the auction. 

Apparently MBS were encouraged following the auction also.  4.5's fought back to near unchanged levels today, currently down 1 tick at 102-09.  As you can see  elsewhere in the MBS stack, there's more green than red at the moment. Spreads went out at their tightest levels of the day.

Due to settlement, we can't infer much by way of technicals in MBS charts today, Fortunately, there was a clearly defined trend channel in 10yr note yields.  This was a bearish 3 day trend, beginning with closing level lows on the 10th. Those lows connect with yesterday's early morning and late afternoon lows to form a trendline.  Parallel to that would be the other line of the trend channel which connects the highs.  It was actually this trend channel as opposed to 3.37 itself that put on the best show today. 

Why is that?  In short, because the lower line of the trend channel is the only trendline that tsy yields crossed only one time today.  Sure, 3.37 is close enough for the horizontal line game, but what yields have really been doing this week is UNDERGOING A MODERATE BACK-UP FOLLOWING THE NFP RALLY, which synergizes with the other goal of auction concessions.  Once we saw yields seemingly meet resistance at 3.40 this AM only to edge higher and higher, the channel became clear. 

That set the stage for the lower end of the channel to offer resistance to further gains after today's strong auction.  It also seemed important that this channel be broken in order for the 3-day bear trend to be broken.  It was in the breaking of that trend that we see the small-scale technical bounces: 1 clear resistance bounce, then a breakthrough followed by a clear support bounce.  On both these bounces, 3.37 was broken (read: not quite as accurate a predictor of the pivot point), whereas the trendline perfectly predicted the resistance/support pivot point bounce. 

Classic pivot move.... Knock on one side of the door, leave the house, knock on the other side, move on... Let's just hope that "moving on" is the gameplan after tomorrow's auction!

In addition to the 1pm auction of 30yr bonds tomorrow, there's the standard issue Jobless Claims at 830am, as well as PPI.  At 10am, it's the Philly Fed business index, but expect the focus to continue to center on auction times, with a potential "relief bid" awaiting an average auction result.  There's a lot going on Friday as well, so we'll let The Week Ahead do the work on that one READ MORE