MBS Day Ahead: History Repeating or a Brave New World?

Over the years, we've discussed the concept of "history repeating" in terms of similar market themes playing out, both qualitatively and quantitatively (no QE pun intended).  Like most predictive lines of conversation, it's always best had in hindsight, looking back at the past and saying "see how history repeated itself there?!"  When the repetition hasn't happened yet, the conversation is more about simply considering the scope of what might happen based on how things have happened in the past.  Even then, past precedent doesn't always define the range of reality in the future.

But let's pretend it might and ask ourselves if history is repeating itself with respect to bond market movement.  Today's case study involves the only other time in bond market history when 10yr yields finished the first leg of a strong rally by bouncing at 1.68, late 2011.  From there, the movement has been substantially similar to the present day.  Both moved abruptly higher and both returned to struggle with the mid 1.8's as a floor of resistance.  There's an important difference this time around though.

The long term downtrend (teal lines) make things very different indeed.  Back in 2011, if you disregarded the initial move down to 1.68, the ensuing battle with 1.8's would still look out of place in the bigger picture.  It wouldn't fit with the intact trend that preceded the sharp rally.  In other words, it broke that rally trend and 'something else' began to happen.

In the current case, if we factored out the initial drop to 1.68, the battle with mid 1.8's fits right in with a regular old battle with the lower end of the trend channel.  In other words, 'something else' hasn't yet begun to happen.  It's still the same old rally trend, and it will continue to be a rally trend even if we lose twice as much ground as we lost yesterday. 

Of course, it wouldn't be fun to explore that territory so quickly, and of course it would be even less fun if the trend was subsequently broken.  But it makes more sense to observe these trends play out from a defensive lock/float stance anyway.  Now is a good time to be protected against the potential bounce that's forming and to rejoice if it merely turns out to be a false alarm.  The red line in the chart above is a good area to keep an eye on (roughly 1.99).  Breaking above could be a technical trigger for further selling or a firm bounce.