MBS Day Ahead: End of a Decades-Long Trend for Treasuries

2013 draws to a close today and it will officially break a 20 year trend in bond markets.  Since 1993, 10yr yields have returned to the same boundary of the same linear trend channel precisely every 5 years, but 2013 didn't come close (see the chart below).

The implication borrows logic from Bollinger and other technical analysis.  That logic generally says that when a security has been regularly returning to a technical boundary and then noticeably falls short of returning, it's a sign that the momentum previously responsible for the regular returns is waning and perhaps shifting.

To use an analogy, imagine rolling a bowling ball down the alley with the bumpers up.  If the ball weaves back and forth and makes contact with the left bumper at regular intervals 4 times in row, it's fair to expect we'll see another bump at a similar interval.  But if the ball doesn't hit the left bumper a 5th time, at the very least, we can conclude something about the pattern has changed.

None of this has any short term significance this week, but given that today is the last day of 2013, something to reflect on and to keep in mind going forward.  If parts of 2013 seemed relentless in their ability to push rates higher, this potential break from tradition is one of the reasons in the backs of the minds of those doing the pushing.

This morning's data is the most condensed of the week with Case Shiller Home Prices, Chicago PMI and Consumer Confidence all within the 9-10am hour.  Activity should die down quickly heading into the PM as bond markets close early at 2pm and are completely closed tomorrow.  Any suggested effects from economic data may be overridden if end-of-year position-squaring is happening in large enough volume.