The Day Ahead: MBS Roll, Auctions Begin, Limited Econ Data

Bond markets spent the better part of Monday in the throws of a fairly straightforward correction from Friday's post-NFP rally.  In fact it was slightly more straightforward for Treasuries (see chart below), whereas MBS trading got a bit sloppy in the less liquid afternoon hours.  Despite underperforming yesterday afternoon, MBS are still at their best relative values since March 20th and have held on to much of the outperformance streak that began abruptly last Thursday.

10yr Treasuries and S&P Futures including Monday's Asian and European trading hours:

The chart above is interesting for a few reasons.  It shows the regularity of the bounce back from Friday's low yields (10's are in yellow), and that the pace of the bounce was essentially set at the end of last week.  That's not to say that bond markets were destined to sell-off today, but once they found themselves selling off, the technical guideposts were already in place.  This is further evident from the pivot bounce at 1.75--a longstanding aggressive rally target.  More than a few market participants didn't have anything lower on their radar coming into last week.  Depending on the strength of the overnight and early morning sessions, we can either hope for this to hold up supportively or not to prove to be too ominous on the way back down (if that happens).  On a final note, the chart shows a bit of pull from the stock lever on Monday.  It wasn't highly correlated short term, but on a few occasions (especially into the 2pm hour), the push/pull between stocks and bonds was noticeable.

Today begins 3 days of Treasury auction supply with 3yr Notes at 1pm.  The need to accommodate that supply may have played into some of the weakness yesterday, but we're guessing there's more defensiveness to play out, all things being equal.  Not only is it more common to see weakness ahead of auctions, but the need to get in position all the more likely.  The caveat to this is that the weakness is always relative to broader movement.  In other words, if broader bond markets are rallying and stocks are selling, 10yr yields could still fall, but merely fall less than other debt yields.  To be sure, we have an eye on 1.75 as potential friend or foe as well as the lowest line on the long term trend channel in the chart below (same long term trend channel we've been charting for several months):

Fannie and Freddie 30yr Fixed MBS roll from April to May coupons at the close, which will make for the appearance of roughly a 10 tick drop in prices.  Economic data is limited with only Wholesale Inventories at 10am.  Tradeflows and technicals will continue to be important for Treasuries and MBS always run the risk of liquidity related volatility around the roll.