MBS Live Week Ahead: Countdown to Bond Breakout Begins

Over the past two months, we've seen higher lows and lower highs in 10yr yields and mortgage rates.  On a chart, this looks like 2 sides of a "triangle," and is sometimes referred to as such.  Other names include "pennant," or simply "consolidation." 

Regardless of the word used as a label, consolidative ranges have an obvious and irrefutable implication: yields must eventually choose to break the upper or lower line.  In the strictest sense, that means bonds are "choosing a side," and potentially revealing some intention to move higher or lower.  But as with any technical pattern, there are caveats.

Consolidations are going to happen and they're not always going to be incredibly significant--at least not in the sense that the first break outside an established consolidation signals a major shift in momentum.  Additionally, the first break can be a head-fake that takes weeks to resolve before we see bigger momentum in the other direction.  In other words, when we see yields move outside converging lines, it doesn't necessarily guarantee follow-through in that direction.

All that having been said, the fact that lines are converging in an obvious way is almost always significant.  The current case is no exception.  Yields had been trending lower since March 2017, before breaking above their trend of "lower highs" in late October.  Rather than continue to surge higher, however, yields then began the consolidation pattern that we've been talking so much about recently.  It's as if bonds are deciding if they really want to abandon that generally positive trend from the Spring.

While there are a few economic reports and Fed speakers on tap for this week, those aren't the big-ticket market movers for bonds at the moment.  Bonds want to see if congress can get a passable tax reform bill on the president's desk in the next 2 weeks.  If that happens, risks greatly increase that rates break higher.  If it doesn't happen, play could resume for the positive trend that had been intact for most of the year.