Range Consolidation Continues After Apathetic Bond Auction. Energy Builds Toward Breakout

Treasury just auctioned $13 billion 30s at a high yield of 4.515%. This was 2.2bps above the 1pm "When Issued" yield. The bid to cover ratio, a measure of auction demand, was in line with recent 30yr auctions at 2.67 bids submitted for every 1 accepted by Treasury. Dealers took down a slightly higher than normal 49.9% of the competitive bid. Directs also took down a higher percentage than normal at 12.4% of the issue.  Indirects took home a 37.8% or $4.9 billion, which is line with recent averages. Because of the 2.2bps tail and forced uptick in dealer participation, we'd be biased to say this auction was "average at best"

So what's the implication? 

"Average at best" may sound a bit ominous, but all this auction really had to accomplish in order to keep hope alive for strategically bullish viewpoints was not be terrible. It surely was not terrible...

What you should see there is a market that was gearing up for today's auction by pushing yields higher in the morning.  Had that continued, it could well have made for stronger auction results, and thus we'd be rallying into the low 3.3's instead of selling into them. 

But the market decided to throw a change-up vs it's tendency to push yields higher before the auction and instead took a nice little lead-off.  That little lead off got perhaps a bit big for the auction results, but was generally in the right direction as we can see by the pivot behavior around 3.35.  It had been short term resistance...  Front running broke it....  Post auction trade supported it.  1-0 good guys, as that support will help MBS stay over 102-12. 

Looking at the MBSonMND Dashboard you can see that 102-12 has served as a supportive pivot point since the rally took flight in the 11am hour. Our reprice target for FNCL 4.5s is still 102-16. If we cross back above that level and maintain positive progress, reprices for the better will be more likely. We've already heard of a few but nothing wide spread yet.

To whatever extent that this afternoon can be called a victory, the big picture is still overshadowed by apathy and uncertainty.  There are plenty of reasons to believe bonds are in the process of shifting bullishly, though solid counter arguments can be made that support higher yields too.  The long term chart below is a striking picture of yields themselves commenting on both of those eventualities, equivocally as possible...

Notice the consolidation around 3.30%. Remember ...consolidation patterns illustrate a market this is storing energy for a sharp move. The comparison we made to the "same pattern" is slightly different in that it formed in a downtrend. In the more recent example we are looking at a bear pennant which is not a positive in terms of our directional outlook, but we must add an asterisk to the uptrend in rates due to the exaggerated manner in which rates spiked. So while looking at this chart from a purely technical perspective is indeed bearish, we do give creedance to the fact that yields likely rose much faster than they would have in normal market conditions.

Plain and Simple: Technically speaking this is a bearish formation. Fundamentally speaking we view this as a potential reversal pattern which could lead 10s back down to 3.00% if all plays out. READ THIS POST TO SEE HOW THIS RELATES TO MORTGAGE RATES

Bottom line: It's been a good week so far, with an acceptable amount of validation of the post-NFP range.  If pre-NFP weakness isn't retraced tomorrow, it's another step in that confirmation process, and could constitute the infancy of some sort of renaissance of strategically bullish momentum.  The question of that potential momentum's longevity, however, cannot yet be answered.