Technical Support for Treasuries and What it Might Mean for Lock/Float Strategy

Who in the world would talk about SUPPORT (evidence for an intermediate FLOOR for prices) when 10yr yields are around 2% and MBS are near all time highs?  We would...  But not because we're sure these supportive developments are here for the long haul.  We'd just like to point them out to you because we think the current goings-on in 10yr yields and MBS prices are potentially a great way to look at intermediate to longer term lock/float strategy.

You may be well aware that bond markets are generall weaker today.  But take a look at the following chart of 10yr yields vs stocks.  As opposed to the extremely high correlations we've seen recently, 10's started to deviate a bit today and "hold their ground" versus rising stock prices.

As you can see, they'd been tracking pretty well but TSYs refused to follow stocks higher at the same pace today.  Your mind's eye might already be seeing something happening around 2.06, and so does ours.  The next chart puts that phenomenon into a bit of context. 

Sorry... there's a lot going on in that chart... here's a blow by blow

- 2 red lines show the converging (and COMPETING) trends that had been in play during August

- The bullish trend (the one that slopes DOWN) "won," and the bearish trend "lost"

- You can see the bearish trend being tested on a few occasions, but not definitively broken until early September

- In fact, we do think this is MORE ABOUT A "STAVING OFF" of that bearish trend!  Recall that had been the "counterattack" line.  In short, counterattack = thwarted (for now)

- That reintroduces the SIDEWAYS technical levels and those have clearly been present at 2.125 and 2.06. 

- Is it a coincidence that the biggest recent move down came after a break of 2.125? 

- The most important part to note is that after all the high volume testing of 2.06 as a yield floor, it has recently acted as a ceiling (and as the first chart noted, even if that's meant defying the stock lever). 

Long story short, it's clear that 2.06 means something.  Even if we're not willing to flat-out RELY on it for ongoing support, it makes sense to keep an eye on it as a potential indication that new technical "tests" are upon us.  You might think of a "test" as the line on the chart "is considering doing something different than recent patterns." 

This is particularly useful when we take a not-too-big of a leap and line up that 2.06 level with a similar inflection point seen in MBS, both in 3.5's and 4.0's.  Here are charts of both:

Bottom line, even if it's not a glorious promise of low rates forever, perhaps the current technical environment can serve as a good, broad warning sign of shifting trends.  After all, that's their job!