Snowball Selling Avoided for Now. More Relief Rally Needed
Today's bond market response to the 10yr note auction was encouraging. But it should not make us complacent or lower our defensive shields. This is an environment that is and will continue to be very dangerous for bonds and mortgage rates. There is much left to prove before we can even begin to hope for a return under 3.50%. A small portion of that work may be done tomorrow. Or perhaps it would be better to think it will "not be undone" tomorrow by the 30yr note auction. Our outlook on that follows today's charts.
Note the resistance the 10yr is facing in getting back across the 3.63 zone. Below that 3.56% is a clear pivot point.
MBS seemed to be a bit shy of yesterday's lows, suggesting we should be watching that level tomorrow morning for further signs of encouragement.
With bond yields across the curve as high as they've been since early/mid 2010, the notion of this week's auctions being a potential "buying opportunity," is a logical one. Of course that wasn't validated so much by the 3yr note auction yesterday though. Cold bowl of porridge offered there. But once we ventured further out the yield curve the porridge got too hot for "bearish" taste-buds. While we'd be unrealistic to expect similar "knock the cover off the ball" results again, we do see reason to view tomorrow's long bond auction as another bargain buying opportunity. The Great Chase for Yield continues on Wall Street.....
Also consider the recent surge in Fed Funds Futures which now implies traders expect FOMC rate hikes by the end of 2011. That means the short end of the yield curve should be viewed with a bit more disdain than usual (yield curve risk). Add the market's aversion to overcommitment in the short end of the TSY curve to the fact that 30yr yields are very near their highest levels overall since 2007, and they go on sale tomorrow with known interested buyers in the crowd.
The whole thing gives the appearance that it's going to be at least average, if not better. And it's really too bad the market is giving off this clear of a signal because it tends to do whatever it needs to do in order to prove the highest number of opinions wrong.
Either way...we need this positive progress to continue to avoid SNOWBALL SELLING and another move higher in "Best Execution" mortgage rates.