MBS Day Ahead: Important Day for The Shorter Term Trend

The direction of the trend in rates (or "bond markets") varies depending on the time frame in question.  For instance, looking back to the 1980's, rates are still in an epic trend lower.  That only really changes if we begin our assessment in mid-2012 or early 2015.  This most recent move from early 2015 would be considered the current longer-term trend.  Any push back against that would be a shorter-term trend.  This can be seen in the chart below as the teal lines moving lower within the context of the yellow lines (the candlesticks themselves are each a day's worth of movement in 10yr yields).

Granted, the first major counterattack during March looked promising, but all of the sideways action that followed set up a heavy band of resistance just under 2.0%.  Fortunately, we've just seen a heavy band of support (a big clump of mostly sideways trading that followed a sharp sell-off) beginning in mid-June.  In fact, as long as yields remain under those mid-June levels, the longer term uptrend in rates could be considered stalled out.  Additionally, the current short-term downtrend has a few things going for it that the previous attempts did not.

March can essentially be thrown out.  It was a volatile mess of trading with nonfarm payrolls coming in at +295k and Europe beginning QE a few days later.  There was really only one day of true positive momentum for US bond markets (3/18) with the rest of the move being a frantic attempt to make sense of the European bond market mega rally (that's when German Bunds were still on their way to 0.05%).

The next move in late May was more of an afterthought for the month and largely fueled by month-end bond market tradeflows.  It was quickly reversed. 

That brings us to the current move lower.  Naturally, if we're going to chalk May's rally up to month-end trading, it begs the question: isn't this the last week of THIS month? 

Yes, yes it is.  That makes the beginning of next week an important time to watch.  There is enough room inside the current trend for some more weakness this week.  Even if it materializes, it's unlikely to send the same sort of signals we saw the last time that bonds improved for two straight weeks.  These similar moves are highlighted in the chart below, and were discussed previously.  The point is that we're nowhere near the negativity seen during the last similar week.

Today COULD change that, but it's a major wild card due not only to the fact that it's our first look at Q2 GDP, but also that the commerce department is applying annual revisions.  This will change both the current report and the past few years worth of GDP data.  Some say the government is just trying to make things look stronger than they are, but markets tend to react regardless.