MBS Live Day Ahead: Bonds Threaten to Confirm Big Bounce

Yesterday was the warning shot and today could see confirmation that bonds are indeed bouncing.  Actually, it's probably more appropriate to view yesterday and today (depending on how it turns out) as a rejection of the breaks below various trends and technical levels seen last week.  We discussed these in the form of the downwardly-sloped trend channel (yellow lines below) and the pivot point at 2.12% (teal line below).

The aforementioned technical levels were broken fairly convincingly (i.e. nice move below that was held for several days) but unfortunately, that break was predicated on temporary events driving a "risk-off" rally.  As the worst fears relating to Irma and North Korea have abated, so too has the rally.

Whether or not this ends up being a mere return to recent ranges or true shift toward weaker momentum remains to be seen.  We'll stay defensive for now--at least through the blast of bond issuance over the first 3 days of this week, and possibly all the way through next week's big Fed Announcement.

There are no major reports today, but the 10yr Treasury auction at 1pm could cast a vote on the nature of the current bounce.  Finally, keep in mind that this is a "roll" day for MBS.  Prices are lower than they otherwise would be because October coupons are now the most current delivery month for Fannie and Freddie 30yr fixed MBS (and each subsequent delivery month is priced a bit lower than the preceding month).