MBS Live Day Ahead: A Bullish Big-Picture Case for Bond Markets

There are no significant data or events on the calendar today and the Fed remains in its "blackout period" (where Fed speakers abstain from commenting on monetary policy in the week and a half leading up to a Fed Announcement).  On top of that, we've made no bones about Thursday being the focal point for market volatility as traders wait to see what comes of Comey's congressional testimony.

But despite all that, the day begins with bonds at the best levels of 2017 thanks to a "risk-off" move in Asian and European markets as well as headlines regarding China's intent to start buying more US Treasuries.  The ability for bonds to rally  at current levels, even as we wait for the seemingly more important market movers later in the week, speaks to the current bargaining position of bond bulls.

If we use a 1-year moving average of 10yr yields (252 business days), not as a magical line in the sand, but rather as a way to observe broader market themes, we can see some similarities between the rate spikes of 2013 and 2016, and the subsequent recoveries.  Long story short, once yields start flirting with this 1yr average after having moved as far away from it as they have in both of these examples, the 2013 version suggests it's the beginning of a process that ultimately leads to further gains.

Before getting one's hopes up too high based on this chart, the normal caveats apply.  This is Technical Analysis, based solely on math applied purely to trading levels.  Fundamental Analysis, on the other hand, would argue that there were perfectly good reasons for the 2014 rally (the birth of European QE, mainly), and that we'd need a similarly potent catalyst if we're to see things play out in a similar fashion this time around.  That's very possible, indeed, but not unequivocally guaranteed.