MBS Day Ahead: Bond Markets Hoping For Technical Support, Fearing a Break

Considering the lack of actionable news and events during the first half of the week, bond market participants can either turn their attention to whatever's left or simply tune out.  While some 'tuning out' seems to be going on, the stuff that's left is becoming somewhat interesting.

Reason being: when market-moving considerations die down, one of the only things left to examine are technicals (analysis of outright trading levels for insight on trends and ranges).  Technicals have become exceptionally interesting over the past two days as 10yr yields bounced at a key level on Friday and continued to hold it yesterday.

The level in question is 2.82.  It's easily determined by one of--if not THE most prevalently used technical overlays: Fibonacci retracement levels.  The great thing about common technical indicators is that there doesn't have to be any debate as to how relevant they are because if they're common enough, we can at least assume that a meaningful portion of market participants are aware of them.  This can be thought of like a big chess match where you and your opponent are each aware of the next three possible moves and are simply trying to get inside each others' heads.

If traders are trying to get inside each others' heads concerning this 2.82 level, there are two main choices: to bounce or to break.  From a technical standpoint, if it's broken the next implied level would be over 3%.  The longer it remains unbroken (yesterday was day 1), the more significant it will be when it finally breaks.  Unfortunately, simply bouncing repeatedly at 2.82 doesn't guarantee it will continue to hold.

That said, the 2.82 and 2.60 levels that mark the recent highs and lows do not seem like accidents in the grand scheme of things.  Ask most technicians which two Fibonacci levels are the most significant and two out of the 3 answers you'll probably get will be 62 and 23% levels.  Take a look at the chart above to see how yields have consolidated inside that range into the new year.  The first significant break could be seen as a big deal, possibly hearkening a run to 2.47 or 3.04. 

Beyond the technical considerations, we still run a chance to see some motivation come from geopolitical headlines as well as the hefty corporate debt calendar (no clear positive or negative implications there--just volatility).  Additionally, the week's Treasury auction cycle begins today with 3yr Notes at 1pm, but tomorrow's 10yr's stand a much better chance of causing a visible market reaction.