MBS Day Ahead: A Few Clues in Charts That Suggest Caution For Now

If you follow bond markets closely enough, you may have noticed a certain measure of reluctance on the part of 10yr yields to break below the 2% barrier over the past few days.  There were substantive breaks on October 2nd and 14th, but neither day saw confirmation in the following day

"Confirmation" in this context, is a technical term meaning that trading levels were able to hold ground in the new territory on the other side of technical breakout.  For instance, let's say our technical level is 2.02, and that we break it to close at 1.97.  We would then need to close at 2.01 or lower in order to "confirm" the break of 2.02 the following day.  This is the confirmation that has, thus far, eluded our 10yr benchmark.  Several technical studies have flat-lined as well (see the stochastic lines on top of each other in the following chart, indicating an absence of momentum).

It's worth noting that MBS are outperforming Treasuries recently, and their longer term charts convey more of an uptrend--even if only slightly.  Even so, it's Treasuries that dictate the broader bond market momentum, and the technical challenges suggest a cautious approach heading into next week's FOMC meeting.  Again, the FOMC won't hike, and the meeting could even be a let down in terms of new information.  But its bombshell potential is a near term risk that could keep a lid on bond markets between now and then. 

Even if we completely disregard next week's Fed, we can simply say that bonds have been grinding sideways for long enough that they're probably going to pick a direction any day now.  While it's true that they've had less compunction about moving toward lower yields recently, the chart above makes it seem equally true that they could indeed be trying to establish a bottom for now.  At the very least, we can say this 2.02% level is technically significant.  As such, it continues to be the case that a noticeable break below (WITH the aforementioned "confirmation") would be a strong argument in favor of a more prolonged positive trend.  In other words, even though there's a bit of extra risk associated with this potential floor, there's a bit of extra positivity to be gleaned if it's broken.