MBS RECAP: Scariest Week Since 2013 for Bond Markets

If we went back to the beginning of June and asked ourselves "where do we think 10yr yields would be on Friday if Draghi doesn't commit to maintaining QE and if NFP beats by more than 50k?"  somewhere around current levels would be a very good guess.  At the time, yields were around 2.10.  Now they're nearly 30bps higher.  Feels about right...  There's some subtext here, but I'll just state it explicitly: this afternoon's bounce back doesn't mean much to me.  It's more a function of Europe and the intensity of the pain already experienced this week.  If we hadn't freaked out quite so much earlier this week, today would have been the massive freak out. 

Conversely, if we didn't gain ground yesterday, today might have been just another red day.  Here's why:

Looking at this 1-week chart, it's tempting to conclude that rates pushed higher and have now leveled off, but what happens if we look at that same week in the context of every other week for the past few years?  In the following chart, red candlesticks signify upward movement, green means downward movement.  The only promising thing I can see in this chart is that it looks like we might be near the high side of a recent uptrend.  The bad thing is that uptrends can still be broken.

To be sure, much is different between now and 2013.  That sell-off had to do with the rapid realization of a big shift in Fed policy.  This one has to do with the rapid realization of something far less certain--a European recovery.  We also get a bit of a boost from past precedent.  When rates topped out in late 2013, the economic effects were quickly felt.  One of the most widely-followed broad economic metrics, ISM Non-Manufacturing, fell from 2 year highs in August to 4 year lows by the beginning of 2014.  It didn't began improving until rates began falling again.

Apart from hoping for a longer term slowdown to make an argument against rising rates, or the hope that Europe hasn't really turned a corner, we don't have much to suggest this week isn't a scary confirmation of 2015's momentum. In technical terms, another week of selling would be required to confirm the uptrend.  If next week is a winner, we have a wild card that might get us back in the game.  More on that in next week's commentary.