MBS Day Ahead: Confronting Another Major Inflection Point; Time to Bounce?

The conventional wisdom regarding falling knives is to avoid trying to catch them.  2014's bond yields have been a quintessential example.  At each major inflection point, investors have reached out to bet on rates moving back up only to find they reached too soon.

The last occasion was after 10yr yields hit 2.34--certainly an important big-picture inflection point.  Bond markets digested a mid-September FOMC Announcement without losing much ground.  By that Friday, the lack absence of any material weakness in European markets made it clear that Treasuries were offsides.  Domestic bond markets quickly fell back into line. 

To reiterate, from a technical perspective, the visit to 2.34 may have acted as a cue for a shift in positions.  In any event, it's notable that positions became imbalanced immediately thereafter. 

Why bring all this up?  Because 2.07, or thereabouts, is the next inflection point that's in the same league as 2.34, and we bounced right there on multiple occasions on Friday.  Combine that with the fact that everyone seems to think bond markets can only improve right now (dangerous thinking, even if the only penalty ends up being a brief counter-trend movement), and there's an increased risk that this becomes the scene of another technical pull-back. 

Heading into this week, a pull-back is probably the safer baseline, with any unaccounted-for strength acting to firmly reiterate what we think we already know about global financial markets: things are fairly precarious, and core bond markets will generally benefit from that as long as it continues to be the case.

There's a good amount of economic data on tap right from the outset.  The highlight is on Wednesday, with the afternoon's FOMC events.  These include the Statement itself, the Economic Projections, and the press conference with Fed Chair Yellen to follow.