MBS Live Day Ahead: Bonds Ponder Reversal as Month-End Approaches

The current week begins with bonds holding ground for a 3rd day after a fairly sharp selling spree in the preceding 2 weeks.  The big question is whether recent resilience marks a true shift away from that selling pressure or if it's merely a break in the unpleasant action.  

While this week's economic data and events MAY be able to shed SOME light on that question, I don't think they're ultimately up to the task of driving bigger-picture momentum.  Additionally, while the "big question" may have to do with whether or not bonds are reversing their recent move higher in yield, the "bigger question" is whether they can merely maintain the prevailing trend in 2017 (sideways to slightly lower in rates).

Today's chart speaks to both the big and bigger questions.  The "big" stuff is mostly addressed by the technical overlays in the lower half of the chart.  These include fast stochastics, slow stochastics, and MACD--all momentum indicators.  The bigger stuff is addressed in the upper section.  Really, any yields below that upper yellow line (passing through the mid-2.3's right now) keep the gradual downtrend intact.  Holding below 2.28 and breaking below the 100 day moving average would strengthen the case for shorter-term momentum inside that range.

Fast stochastics show short-term momentum is already very close to giving a reversal signal by breaking below the upper "oversold" line.  Longer-term momentum via slow stochastics wouldn't need to break the oversold line to give a reversal signal.  It could merely "cross" (green line moving below teal).  This isn't always a perfect predictor of the future, but it's fairly reliable the closer it happens to that upper oversold line.  

MACD (bottom section, yellow bars) sort of visualizes the convergence and divergence of stochastic lines (because it's useful to know when they start moving closer after a sell-off, as that would be the first indication of an impending reversal).  In the current case, the MACD lines will put in their 3rd day of decent downward movement if we merely hold steady in bond markets.

In terms of data and events, we'll hear from a multitude of Fed speakers this week.  This could help refine the market's hawkish takeaway from last week's Fed events.  Treasury auction supply hits on Tuesday-Thursday with 2, 5, and 7yr auctions.  Finally, Friday is "month-end," which could promote some additional bond-buying demand on the last 2 days of the week.