The Day Ahead: Continuance of Tepid Rally Depends on Data and Auction

There are fewer and fewer ways to express that the broader themes in bond markets are in place and that this week not only looked like an opportunity for a relatively inconsequential sub-theme, but it is already 3/5ths of the way to proving it.  This week is like a sesame seed on the bun of broader trends.  Or if you prefer a 'Shark Week' metaphor, this week is like the remora that glues it's forehead onto the underside of a big shark.  Sharky is currently taking a short break after swimming from 1.6-ish to 2.7-ish, and for this brief time, the remora's movement seems much more significant than it otherwise would.  When that time comes, it's a big fish's world once again and the little fish has no say in the matter.

The remora in this case is characterized by any 10yr yield between 2.67 and 2.55, give or take.  Anything outside there will take shark power, and there's no reason to expect that until next week at the earliest.  It's possible that if Jobless Claims and the 30yr Auction results aligned in the same direction that the edge of this micro range could be broken.  It's also possible for Asian/European could amount to a swifter ocean current capable of moving our metaphorical shark, but the point is that even that wouldn't be capable of directing the shark's movement once the shark is moving in the direction it wants to move.  That movement is currently absent, so less relevant movements is up for discussion.  End of story.

Not quite the end of the story, but this is simply a housekeeping epilogue.  Today is roll-day for MBS, when August coupons are retired and September's take over as the new "front month" prices.  September prices are lower than August's so when we switch our focus from one to the other at the end of the day, it presents the illusion of a drop in prices.  Here's what it would have looked like yesterday (approximately) if the roll was a day earlier: