MBS Day Ahead: Return to Thin Calendar May Stir Thoughts of Next Week's FOMC

Time for bond markets to start thinking even more seriously than they already are.  2014 and Jan 2015 were great.  No complaints!  We rode the epic wave of European weakness, impending QE, low domestic inflation, and Greek drama to levels that we didn't think we'd see at the end of 2013.  But things got complicated in February and continue to be complicated in March.

Bond markets have been rotating between several big-picture trading cues, and they've seldom been in agreement.  That's evident in the divergence of the long and short end of the the Treasury yield curve.  While 10's and 30's have rallied in the longer-term trend, 2's have done the opposite.  5's have been right in the middle.

When we talk about something like US 10's being on guard against a bounce in European bonds, it's not necessarily because 10's would be compelled to follow a bounce higher in European yields.  Rather it's because POSITIVITY in European bond markets has been keeping longer-maturity Treasuries grounded.  If that positivity looks to have run its course, the remaining trading cues would have more impact.  In this case, that means Fed rate hike panic can move 10yr yields and mortgage rates even though 10's and mortgage rates have been defying Fed rate hike panic for about a year.

Why talk about all this now?  Because next week is a big Fed meeting and March FOMC Announcements have been more important than average when it comes to producing market reactions.  Of course a relatively empty data calendar today would increase the bond market's tendency to ruminate on next week's Fed potential, but the thing that would really add to the uncertainty and volatility would be if that whole "European bond market strength keeping Treasuries grounded" thing from the last paragraph looked like it might take a break.

Well...

Oh... if we have to face that sort of uncertainty, we at least have a clear technical picture developing that shows Treasuries decisively bouncing off some highly-touted technical level, right?

Well... take your pick between an exponential or simple moving average depending on what kind of mood you're in (translation: you can make a case for it either way).

Here's a hint/clue though: don't think of moving averages like ceilings and floors with bounces and breaks.  They're more like guideposts that let us know how a trend is progressing and what it's doing as opposed to what it's going to do next.  For example, right now we could say that 10's have traded on either side of the 100-day moving averages and look like they're consolidating for a bigger break higher or lower.  The day to day tip-toeing around the moving averages doesn't really matter.