The Day Ahead: Do Bears Flag In The Woods?

The week began with another sideways session for bond markets.  Although MBS have outperformed somewhat in the last two session, 10yr yields have gone all 'spooky sideways' in that the last 4 closing levels have fallen within 1 bp of 1.82% and the absolute range during that time not exceeding 8bps. 

That's a narrow 4 days no matter the circumstances, but given the recent, rather fast-paced sell-off, it's a bit spooky.  It's the sort of thing that makes us think of bear flags in bond prices, while at the same time, still hoping that 1.86 marks a ceiling.

It should probably be noted that although the chart above is labeled an example of a flag/pennant formation, that it is, in fact, the current version of the 10yr yield chart rather than some educational example.  Also, for the sake of propriety, the chart above actually depicts a bull pennant, but we tend to use the term "bear flag" ubiquitously for all manner of consolidations during sell-offs that may imply further selling.

We don't mean to scare you with the talk of technical continuation patterns.  Ultimately, this can be thought of a turn of the century Shaquille O'Neal coming to the freethrow line.  Sure... the statistics show he's slightly more likely to do one thing vs. another, but it's pretty much a toss-up.

Same story here...  No one knows what's going to happen ahead of time, but the point is that the risks for further losses are real.  It's not as if we've seen this nice series of supportive ceiling events in Treasuries, or floors for MBS, and somehow know that this is the time that the bounce back materializes.  Markets still seem sensitive to either eventuality and the fact that 10yr yields did not move quickly back down through 1.80 in yesterday's session seems like circumstantial evidence of that. 

As for today, it's yet another one spent in watch and react mode.  There are no significant calendar items at home or abroad, and one of the only events we can find to mention would be an 8:45am speech by Fed Voter Lockhart.