MBS Week Ahead: Balanced Risks for Bonds, Early Auctions, Moderate Data, Eyes on Europe

In terms of the technical trends as of last week, domestic bond markets became more balanced by the end of the week.  Before that, they were certainly at more risk of weakness after bouncing at long-term low yields on Tuesday.  Friday's strength kept many of the mainstream technical studies OUT of the territory that would suggest a bigger bounce into weaker territory was underway. 

For instance, in the chart below, negative risks would be more imminent if the bottom 3 sections (Fast Stochastics, MACD, and RSI, respectively) were moving higher.  But so far, they've been holding steady.  While that's no guarantee for future performance, it's one vote in favor of balance as we begin the new week.

Data arrives at a moderate pace, but most of it arrives in the 2nd half of the week.  Treasury auctions begin on Monday.  If there's a focal point of the week, it's Wednesday, and not just because it hosts what is probably the week's most significant domestic economic report (Retail Sales).  The dark horse market mover is the preliminary assessment by the European Court of Justice in Strasbourg on the ECB's OMT bond buying plan.

Last February, Germany's highest court raised a legal challenge to the OMT plan, suggesting it violated the Eurozone treaty's ban on so-called "state aid."  The reason it's not cut and dry is that there are numerous provisions that outline exceptions to that ban in the treaty.  Most of Europe thinks it's just fine, and Germany (which essentially runs the Eurozone--no joke) doesn't.

Why is all this important?  Because if the Strasbourg court doesn't think OMT is a violation, it would be a big vote of confidence in the ECB moving on to the next level of aggression with quantitative easing.