Rate Techs: Inching Toward a Bearish Breakdown

After testing 3.40% earlier this morning, we think now is the perfect time to remind readers of the pending shift in the bond market's directional bias. From "Rate Techs: Teetering on a Directional Shift"...

"Switching over to benchmark 10-year Treasury notes, the main directional guidance giver of "rate sheet influential" MBS coupons, we see a sharp back-up in process.  Currently 10s are retesting 3.34% support for the third time in as many days. While holding this level would be a bullish indicator, we view 3.40% as the main inflection point.  If 10s failed to stick below 3.40%, trading technicals would lean in favor of the bear camp and a range trade between 3.40% and 3.70% would be on the table. If 3.34% does hold we quickly find resistance at 3.30% and even stronger resistance at 3.22%. Trading between 3.34 and 3.40% would increase our defensive rhetoric but leave us feeling frustrated about offering a directional bias."

At that time, we offered the following chart for perspective...HOLD 3.40%!!!

The above chart illustrates the importance of horizontal inflection levels in 10s, especially 3.40%.  We can also look at developing trend channels for guidance...

Below is a chart showing a potentially BULLISH trend channel in 10s.  As you can see, a cluster of support between 3.36 and 3.39% is the last line of defense before traders begin a more broad-based shift in their directional bias (from bullish to bearish). If this range of support is broken, the market will be looking to confirm a bearish breakdown in technicals by testing higher yields/lower prices.  If we are in the midst of a sustained bond market rally, support should hold here and 10s should venture back toward 3.31% before making a run at 3.22%.

There is unfortunately a BEARISH trend running counter to the above bullish trend channel. While not including the 3.40% inflection point in its path, it does offer an excellent milestone for the potential CONFIRMATION OF A BEARISH BREAKDOWN OF BULLISH TECHNICALS.   In other words, if the horizontal level of 3.40 is broken, we'd wouldn't consider it a confirmed bearish breakout until yields re-entered the trend channel pictured in the chart below (with volume).

If that occurs, we'd be back in range trader mode,  between 3.40 and 3.70% in 10s.  The higher side of that range brings with it "Best Execution"C30 loan pricing in the 5.00-5.25% area.

Plain and Simple: We're still teetering on a directional bias shift. Support hasn't been broken yet, but you should be aware of the above inflection levels