MBS Week Ahead: Time for Short Term Correction or Longer Term Bounce?

Even during the strongest moves lower for rates, we'll still see periodic weakness within the trend.  In other words, if rates are falling and generally staying inside a trend channel (downwardly-sloped railroad tracks that enclose rate movement on a chart), corrections to the upper end of the channels are normal. 

Also normal is the fact that all trends come to an end at some point.  When we see a bounce at recent lows, there's always a risk it could be something more than a simple correction in a trend that keeps going.  With last week's new 14-month lows in Treasury yields being driven by events that are  famous for being fleeting, and with Friday afternoon offering headlines to motivate a bounce in the other direction, we're forced to wonder if the good times for rates can keep rolling in 2014.

The scary part about this in the short term is that rates could bounce quite a bit higher and still remain in the longer-term downtrend.  For instance, 10yr yields could approach 2.60 without threatening the 2014 rally in the slightest.  It's those sorts of technical levels (at the upper end of the trend channel) that we'd want to watch for cues about longer-term shifts).

We'll cross those bridges when we come to them.  For now, we can't even be sure that this week will bring a correction to the rally.  The domestic economic data is generally uninspiring.  Even if it would normally suggest significant movement, markets have had other reasons that transcend most of our domestic economic data offerings. 

The only other consideration for this week's scheduled events is that Treasuries can be under some extra supply-related pressure as 3, 10, and 30yr maturities are auctioned on Tuesday, Wednesday, and Thursday respectively.