MBS Week Ahead: True Inflection Point Will Test Resolve of Post-Jobs Bounce

Bond markets sold-off too far and too fast heading into last week's jobs report.  In fact, even by Thursday morning (overnight), the sell-off had reached such extreme levels of capitulation that there was not one drop left to sell.  As such the biggest surge of bond-buying last week arrived not after Friday morning's NFP, but instead in the middle of the night on Thursday.  The most fascinating thing about that buying is that it occurred with no salient event to serve as motivation.  The "event," in this case, was the tradeflow exhaustion.

The ominous thing about rallies that happen due to selling exhaustion is that they're not typically built on sturdy foundations.  They have more to do with a temporary lapse in pain as opposed to the determined creation of pleasure.  Quite simply, they're positive corrections in a negative trend.

Is that what the past 2 days have been?

We have enough days in the week ahead to find out, most likely.  More importantly, we're getting close to a very important inflection point--one of the only true inflection points of the financial crisis era: 2.05.  This one has more history than any others during this time as it was the first major technical level established in December 2008-January 2009.  10yr yields are once again approaching this inflection point, and a break below would tell us everything we need to know about the current correction (it would tell us it's more than just a correction!).

In terms of the week's data, Retail Sales on Wednesday and Industrial Production on Friday are the biggies.  Treasury Auctions on Tue-Thu also deserve a look.  Punctuating those events will be a moderate amount of reasonably important data, but none of it earth-shattering.  More important than the B-group data will be European bond markets, which have undergone a much bigger rout than US Treasuries.  Realistically, if European bonds can't dig in their heels, it's highly unlikely that we'll be able to either.