MBS Live Week Ahead: Approaching Major Inflection Point Ahead of ECB Meeting

The European Central Bank (ECB) has been one of the driving forces behind ultra-low rates around the world for several years, thanks to an aggressive and expanding bond buying program.  There was a time when the Fed's easing efforts could also be classified as aggressive and expanding.  Incidentally the analogous time frames resulted in all-time lows for global rates in both cases.

The Fed began to shift from "aggressive and expanding" to "still aggressive, but possibly no longer expanding" in 2013.  The result was the Taper Tantrum and a concomitant move quickly higher in rate.  

The ECB hasn't done anything to officially open a tapering conversation, but markets are worried they might be getting close after ECB Pres Draghi passed up an opportunity to promise further extension of bond buying in the early September meeting.  That was followed by an article citing anonymous sources within the ECB claiming a burgeoning consensus on the need to taper asset purchases.

While that has since been denied by official ECB sources, there's an inherent distrust of such official claims.  Markets want to know what the actual central bank policy statements will say.  That's where the rubber meets the road.  And that's exactly what we'll get this Thursday, when the ECB releases their next policy announcement.  

It's unlikely, if not utterly impossible that the ECB's actual announcement will contain any changes in its bond buying scheme.  Not only would that be premature, considering the March 2017 deadline, but the ECB also does things a bit differently than the Fed, preferring to use the press conference as a venue for rolling out major changes.  At the very least, Draghi will get a few pointed questions about what the ECB plans to do after the current phase of bond-buying expires.

Almost as if by design, 10yr yields are approaching one of their most significant long-term pivot/inflection-points at the same time.  More recent movement may make 1.83% seem like less of a hard and fast technical level than it did in 2011/2012, but I think early 2016 only reinforced its significance.  By that time, 1.83% had already proven itself as a key level.  When markets are clearly aware of certain technical levels, it's not uncommon to see consolidation occur AROUND those levels.  In other words, yields formed a wedge (or "pennant," or "triangle") with 1.83% being the mid-point.  

Brexit helped push rates off the fence, but using a step-stool built on ECB-related anxiety, rates are very close to being back on the fence.  There's a chance the ECB could push us in the other direction starting as early as Thursday (press conference begins at 8:30am).  It's not necessarily a better-than-average chance, but it nonetheless makes sense to be prepared for volatility.  Economic data is fairly limited otherwise, with Tuesday's CPI being the only other major release.