MBS Live Day Ahead: Bonds Ready to Move Either Direction After The Fed

Much like an actor can get lost in a role and take things a bit too far, bond markets played the part of "a market undergoing a correction" a little too well.  As of yesterday afternoon, 8 out of the last 8 business days saw 10yr yields close at higher levels than they opened.  Low yields of 2.02 have given way to 2.22+ in just over a week.  

Zooming out to the bigger picture, if you'd been told 2-3 weeks ago that yields would be over 2.22, you probably wouldn't have minded.  After all, that's the technical level we were testing as the last full week of August began.  The abrupt feeling of the recent selling spree comes courtesy of the snowball rally that took place after Labor Day.  That rally coaxed out all inclined buyers and relied on a short squeeze (sellers forced to cover their positions by buying because rising prices were making their trades too costly) to achieve the year's best levels.  

All of the above didn't leave any new buying demand intact last Monday.  Traders felt it was a pretty easy call to sell bonds heading into the Fed announcement.  It remained to be seen "how much" selling that would entail.  As it turns out, quite a bit!  Yesterday's negative momentum can't be chalked up to anything other than a continuation of the same old correction.  It ended up taking yields up and over both of the key technical boundaries (seen in the following chart), and even the 100-day moving average.

I wouldn't get caught up in putting this correction under a microscope though.  The focal point has been and continues to be today's Fed events.  Whether approaching it from 2.22+ or 2.12-ish, the Fed would have the same potential to spark a rally or kick off another wave of selling pressure.  The abruptness of the recent sell-off just means that a post-Fed rally would have more room to run.  The possibilities for a post-Fed sell-off are less clear, but 2.28 would be the first line of defense for a mild sell-off and 2.31% if things get more serious.