MBS Live Day Ahead: Bonds Face Technical Hurdles as Cautious Optimism Continues

With modest gains intact this morning (even after NFP), we're finally in a position to say that all hope may not officially be lost for bonds.  That was a risk as recently as last week, when 10yr yields came incredibly close to piercing the highest levels in more than 4 years.  The selling pressure cooled off on Thursday and Friday of last week, but we'd been in a holding pattern ever since then, generally struggling to sustain a break under 2.95%

Even now, yields aren't looking eager to clear the various technical hurdles on the way back down.  From a technical standpoint, we can't even "confirm" a break below 2.95% until we've closed well below it for 2 straight days.  If you wanted to be a stickler about it, you could say that yesterday's 2.946% finish was too close to act as the 1st of those 2 days.

But even if we declare the 2.95% pivot point to be defeated, the next barrier has already asserted itself this morning.  2.91% has a fair amount of recent history.  It was essentially the ceiling for much of the friendly Springtime consolidation in rates.  Although yields of 2.93% (current levels) are within striking distance, we've already seen one attempt result in a big bounce.

2.91% is also roughly in line with the middle Bollinger Band today.  Yields are by no means forbidden from crossing that line, but it can add to the sense of technical resistance (aka, a "floor") for rates.  If we continue to hold in this 2.91-2.95 range, it's still a modestly positive result. 

Momentum metrics, as seen in the lower section of the chart below, still have room to move down to their lower lines.  A word of caution though: there are a few past examples of long-term momentum undergoing a "false start."  This happens when Slow Stochastics (the bottom pane of the following chart) begin to move lower after a peak, but then move back to even higher levels.

All things considered, I think "cautious optimism" is a fair shift in the outlook at this point, but we need to keep a watchful eye on overhead support levels--especially 2.95% in 10yr yields.