MBS Live Day Ahead: Bonds Fight to Hold The Range as Auction Cycle Begins

We've been tracking several iterations of a sideways or consolidative range since the initial post-election sell-off bounced back in mid January. We say "post-election" sell-off, but it's really the post-FOMC sell-off.

December's highs were driven by the Fed's updated economic projections.  Everyone assumed they would hike, but their future rate hike expectations suggested markets weren't quite keeping pace with potential reality.  

The same could be said for last week's bond market weakness.  In fact, it WAS said by Vice Chair Fischer on Friday when he quipped that there had been a conscious effort to influence the market's rate hike expectations.  There can't really be any firmer evidence of an impending rate hike next week, and markets have certainly moved quickly to price-in as much of that likelihood as they possibly can.

The fact that expectations are so well priced-in means that there's no more additional pressure left for longer term rates--at least not from next Wednesday's rate hike itself.  That said, additional pressure can come from fear that there will be another round of surprisingly upbeat economic projections (the "dots").  Pressure can also come in the short term from supply (both in terms of big corporate bond issuance and the scheduled Treasury auctions over the next 3 days.  

To whatever extent this pressure pushes yields higher, we'll increasingly be breaking out of the aforementioned consolidative range.  Short term momentum technicals suggest we're already eligible for a bounce, but longer term technicals leave us with plenty of room to continue to weaken.  Past precedent is not friendly in these scenarios.  Heading into both of the recent rate hikes, longer-term rates rose in the week leading up to the Fed meeting.