The Day Ahead: Can Bond Markets Keep up This Pace?

Yesterday

- Fannie 4.0s closed at the highest levels since June 19th (FOMC Day)

- Fannie 3.5s closed above the 4-mo moving average last crossed on May 10th (Hilsenrath Fed Tapering story)

- Treasuries below 3-mo moving average for first time since since May 10

- Mortgage rates flat or better for 10 straight days

Today

- Focus is on Durable Goods and New Home Sales in the AM. 

- Either one could help reinforce a pause in the rally if stronger than expected

- New Home Sales missed badly last month and the forecast calls for that damage to be largely undone

- 5yr Treasury Auction at 1pm: more significant than yesterday's 2yr auction, but still not as important as economic data

Strategy

We like rallies just as much as anyone, but bond markets are getting into territory where they'll now require increasingly supportive (read: "negative") economic data in order to keep feeding higher prices and lower yields ahead next week's Jobs report.  Note the "lesson learned" in the second chart below.  Shorter moving averages and 10yr yields broke through the yellow line, but quickly broke back in the other direction after a surprisingly strong Jobs report in May.

This isn't to say that further gains aren't possible, simply that they'll be increasingly hard-fought, and reliant on crappy econ data.  Keep in mind that the faster rates fall, the more challenging it is for lenders to keep pace with market movements in terms of "passing along the gains" on rate sheets. 

In general, we're expecting the recent rally to level-off and to get a bit bumpier ahead of next week's NFP, unless this week's data manages to be universally awful.

Charts

Fannie 3.5 MBS

10yr Yields and moving averages