MBS Live Week Ahead: Bond Markets Aren't in 2014 Anymore, Let Alone Kansas

Sorry Kansans.  Another false alarm where your home state was in the headline but only as a Wizard of Oz reference.  For bond markets, it's an apt allusion.

2014 was home sweet home for analysts trying to understand and predict the course of 2017.  I even highlighted this a few months ago in this piece.  My conclusion at the time was that the similarities to 2014 were all well and good, but that they were just a visual representation of the laws of market physics following a colossal sell-off and that it would take some fundamental motivation for the rally to continue.

As it happens, we don't have anything remotely similar to 2014's fundamental motivation--the inception of ECB's full-fledged bond-buying efforts.  In fact, there has arguably been the opposite sort of motivation given that the tax bill drafts have actually come together before the holidays. 

While the possibility of a fiscal fumble is exciting for would-be bond buyers, the risk of legislative success has bonds on the ropes for now.  Long-story short, whereas 2014 played host to a clean break below the 200-day moving average (not just a clean break, but the sort of "testing" and "confirmation" that technicians can only dream of), 2017's movement around the 200-day moving average in 10yr yields has been anything but clean.

The takeaway is that we'll continue to cope with the possibility of additional weakness, even if we can talk logically about fundamental reasons that bonds should be doing better.  A closer look at current technicals suggests the same sort of slightly weaker indecision.  Several of these technicals leave the door open for a positive bounce, but have definitely been shifting ominously.

As for fundamental motivation this week, we have one of the bond market's favorite indicators of the year with Consumer Prices on Wednesday morning.  We should also expect ongoing headline potential on tax bill drafts from Congress.  The more it looks like consensus is achievable before Thanksgiving, the more we should worry about the trajectory of rates over the holidays.