MBS Live Day Ahead: Bond Markets May Be Done For The Holidays

Take a few steps back from the shorter-term charts (we tend to watch at 2-day chart for most lock/float purposes on MBS Live) and a theme begins to emerge about bond market momentum over the past 2 months.  There has been additional reinforcement of that them so far this week as Tuesday's high yields and Wednesday's low yields hit the same trendlines that began to suggest a holiday consolidation.

What's a holiday consolidation?  Quite simply, warm bodies start disappearing from trade desks (and of course, from Capitol Hill) this time of year.  There's one major wave around Thanksgiving, then after a few weeks of work, a much bigger exodus for the Christmas/New Year holidays.  When traders start tuning out, it's not uncommon to see trendlines emerge on charts like bowling bumpers.  Sometimes those lines are biased in a certain direction.  Other times, they're converging on roughly similar levels for the first week of December.  That's what's happening so far this holiday season.

It should be noted that the lower line of that consolidation above could be drawn with a slightly more aggressive upward slope if we used early November as the starting point.  In that case, it would be perfectly flat.  Either way, the flat stochastics (momentum indicators in the middle 2 sections of the chart) and the declining volume tell us all we need to know.  At least for now, traders have punted on making bigger decisions until after Thanksgiving.  

Experience suggests that Thanksgiving week itself can break outside the consolidation, but more often than not, yields tend to return when more robust trading resumes in early December.  All this to say, bonds are flat in the bigger picture.  Momentum is flat.  And it would take a break below 2.30 or above 2.42 for that assessment to change.