MBS Day Ahead: Decision Time For Bond Markets After Running Out of Momentum

Yesterday's trading activity, while light, was a welcome addition to Friday's.  The two combined to completely reverse the somewhat scary negative bounce that followed Wednesday's FOMC rally (for those of you playing along at home, that's "down, up, down, down" for rates from Wednesday' through yesterday).  But the second day of improvements wasn't enough to break 10yr yields or MBS through their best levels from Wednesday.

Given that trading pattern, and other technical developments, bonds would really need to break through that resistance today in order to keep the rally alive.  Otherwise, they risk a more pronounced bounce than they experienced last Thursday.  As for the other technicals in play, there are a few to discuss, but one of the simplest is the Relative Strength Index in the chart below.  Simply put, when RSI (the moving line) falls below the lower horizontal line, Treasuries are overbought.  While that doesn't necessarily mean they'll reverse, it does mean they need to make additional gains or RSI will move back above the lower line, which is the first phase of the reversal signal (the second being when it makes it 50% of the way back to the upper line).

There is more data today vs yesterday, with New Home Sales, FHFA House Prices and the Consumer Price Index (CPI).  It's not uncommon for big beats and misses in New Home Sales to move markets, but of the three reports, CPI probably has the most potential to set the tone.  Thankfully, it looks like it would have to beat the forecast by quite a bit in order to look bullish in this context.  Core CPI is as low as it's been in 3 years and forecast to remain unchanged.  Headline CPI is expected to bounce back, so the more interesting risk is that it stays in negative territory.