MBS Live Day Ahead: Don't Let 3.0% Make You Dumber

You won't be able to avoid "3% 10yr Treasury Yields" this week.  For starters, 10's have already hit 3.0033% today, but simply being close seems to have everyone inside and outside the industry talking.  As is often the case when there's a big, obvious trend that hits/breaks a big historical level, the conclusion of most professionals and laypersons is that "rates will continue to rise."  Such insight deserves one of these:

"Rates are gonna rise" is the easiest call to make in a world where the Fed is hiking, QE purchases are abating, and the government is financing more spending by issuing more Treasury debt.  There are other pressures, but these are the biggies.   It's logical and normal to assume these things put upward pressure on rates.  It's logical to think that 10yr yields will go appreciably higher than 3%.  In fact, my base case for a new "sideways trend" to emerge out of the decades-long bull market has a 3.25% ceiling.  Notably though, the most liberal trendlines charting that decades-long bull market still haven't been broken.

But the chart above is a bigger-picture discussion for another time.  If 3.25% holds, it will be more than a year before we can truly tell if the bull market is dead.  Even then, it HAS TO die some time because rates can't go perpetually lower into negative territory.  

A more pressing matter is that of the conclusions being drawn about recent, logical weakness.  It's paved the way for some truly dumb conclusions.  Without naming names, one of the best examples from today contained a comment to the effect of "rates are headed to nearly 4% because of the bounce just over 2% last Fall."  The logic was that the 2% level was a "higher low," and therefore a technical indicator of a reversal of the trend.  It's pretty clear based on the rest of the article that the analyst used a common trend channel to plot another line across recent highs and that the line hits "nearly 4%" by the end of 2018. 

Nothing too exciting here, but I feel like it ignores fundamental risks and more importantly, past precedent from technicals.  The latter suggest there's absolutely nothing special about "higher lows" of this magnitude and over this time frame.  If I were to make a case for higher lows, I'd be more interested in the green circles below (which are both higher lows and higher highs).  This is the dominant "internal trend" since 2012.  In this assessment, we'd assume some overrun on either side of the trendlines, but that the general trajectory would match.

Here's the bottom line and all you need to know about any prognostication like this: the long-term bull market in bonds has already clearly made an attempt to slow down by not setting a big new low in 2016.  "Higher lows" are always going to be there if some crackpot wants to assume they mean something.  Over such long time horizons, "higher lows" are just natural features of the landscape, and not technically significant.  That doesn't means rates can't/won't go higher--just that it has nothing to do with causality from technicals.  Instead, technicals like this will be the byproduct of the fundamentally-driven trade (make sure you understand these last 2 sentences.  If you don't, please ask me for clarification and I'll be happy to elaborate).