MBS Live Day Ahead: Quickly Becoming a Battle to Remain in a Friendly Trend

As we discussed last week, the positive technical signals don't get much clearer than they did after Friday's CPI data (weak inflation helped bonds break a floor that had been stubbornly holding for several weeks.  At the time, the biggest risk as I saw it was that the positive cues were "too obvious."  When there's such a resounding confluence of technical and fundamental input, it makes sense to ask the question: if everyone wants to be a buyer, who are they going to buy from?

The weakness seen yesterday (and so far today) is exactly what we risk by following the technicals to the letter.  Frustratingly enough, we still haven't seen enough weakness to abandon our hope for a broader shift toward lower rates.  That could be a decision for today, however, if bonds end up selling-off in a bigger way.

This chart was snapped a few minutes before some bigger selling that has since taking yields up to 2.327.  That selling puts us right at the breaking point where the lines on the MACD section at the bottom of the chart are the same size (as opposed to trending lower, which is what we want).  

Long story short, today is now all about watching out for any additional weakness, and increasingly favoring locking if yields rise much above 2.327.  The truly risk-tolerant among you might consider the behavior of the MACD technical in July where we'd just broken below the zero line and had begun to reverse course only for the broader rally to resume 3-4 days later.  I would warn that July wasn't a perfectly comparable precedent (the current rally hasn't been quite as strong, and the preceding sell-off was broader-based this time around), so take that example with a grain of salt if bonds do continue to weaken throughout the day.

If, however, the worse we end up seeing is this run up to 2.327 and it's followed by a nice bounce back below 2.316-ish, that would be about as perfect a technical confirmation of broader positive momentum as we're going to get (because it would mean that we've traded through last week's big caveat of the technicals looking "too obvious").