MBS Day Ahead: Hoping For Consolidation vs Correction

• "Consolidation" would mean yesterday's high yields were a short-term ceiling
• "Correction" would mean more pain for bond markets
• Yellen speaks at congress... today's only key event
• Will she strike a similar tone to last week's press conference?

Bond markets are on high alert after jumping appreciably higher in yield to begin the week yesterday.  In market jargon, yields "gapped out."  These sorts of gaps are generally regarded as significant from a market-watching standpoint.  The general thought is that the gaps will be tough to move through in the future.  Conversely, if yields do manage to move through the gap, that movement would carry extra significance.  In other words, it would be a good sign if 10yr yields could get back below 1.62.

But for now, let's look at an hourly chart of yields.  It won't show the gap, and will instead let us look at the two basic options facing bond markets heading into Thursday's Brexit vote.

Green, for lack of a better term, is good, and such a consolidation is as good an outcome as any over the next two days.  If we have managed to continue consolidating by Thursday, the Brexit vote will likely kick Friday off with a noticeable break higher or lower.

In the meantime, there's Yellen's semi-annual congressional testimony beginning today at 10am ET.  What can the Fed Chair say that wasn't already said at last week's press conference?  To be sure, she'd be hard-pressed to be any more bond-friendly than she was.  All that's left is for her to backpedal on her relatively gloomy economic assessment.  Let's hope we don't see that, but even if we do, I'm not sure markets would view it as that significant.  

The exception would be if her backpedaling includes some form of contingency on the Brexit vote and jobs data.  For instance, if she says the Fed will Hike in July if NFP is strong and if the UK remains in the EU, then things could get interesting.