Stored Energy: The Sideways Freight Train is Running Out of Room

When the first vestiges of economic recovery were ostensibly seen in 2009, we got a taste of the "freight train" mentality in looking at the stock market and its relentless momentum.  There could be no naysayer, no data, and no event that could force it off its planned course.  Bit of an overstatement there, but there were times when it felt that way to many MBS watchers.  Now the freight train has returned, but in slightly different guise, and while the stock market could still be a freight train for all I know, it's not the subject of tonight's notes.

Tonight, we're calling out the Great Sideways Freight Train...

By "calling out," I do in fact mean that we're issuing a challenge to the bond market to DO SOMETHING!  EXCITE US!  SHOW US A PULSE!  We're throwing down the gauntlet in the hopes of FEELING some sense of PURPOSE behind the trade.  For about a month now, bonds have been range-bound.  That's OK, because before then, they were anything but stable in range!

Now the recent back and forth consolidative pattern may look to you like someone just started scribbling poorly written "M's" under strict instruction to "stay inside the lines" but I assure you it's really an hourly chart of 10yr yields!  I know, I know...  I was as shocked as you are...  

Point being: what has really happened in 2011 so far?  NFP was a big victory?  Yes it was, but it came at a weak point for bonds, thus just helping the larger context range-bind to remain in place.  I had hoped that decent auctions this week and a Friday data day (today) that was at least neutral for bonds might help us probe the lower 3.20's, but the bond market said "no thanks... not enough for me to get inspired."

Maybe it's that simple, or maybe it's unwillingness to get overly aggressive before the long weekend?  Volume was lower today, but not terribly so.  Where's the inspiration?  What will it take?

Speaking of uninspired, MBS didn't show up with their own drummer today.  Apathy is infectious....  Bonds in general are apathetic concerning their overall range, and MBS today were apathetic in the short term, content to strap themselves onto treasuries bumper and enjoy the ride.   

So many things about the bond market are suggesting it has no pulse at the moment.  But in an extreme paradox, this is perhaps the most exciting thing of all.  Why?  Because of that same old "stored energy" we keep bringing up.  Just like in the movies, "it's quiet, almost too quiet..."  Then Bam!  Oops! Pow! Surprise!  And although the movies don't usually entail climactic scenes with big bond market rallies or sell-offs, the underlying theme is the same.  Something's going to happen... Energy is storing in a consolidative manner.....  At some point that stored energy will be released...With the sideways freight train running out of room to run....We better hope it the end of the line (track) corresponds with a bond friendly headline...Or that stored energy will be released the wrong way.

GUT BIAS: Unless some damning data or government sourced tape bomb crosses paths with the bond market, recent market fundamentals, if left unchallenged by unexpected news or economic data, seem to suggest the bond market is in a good position from which to make an attempt at lower yields.  We need more motivation though! And if we do rally, we'd still be nervously defensive about further positive progress,