MBS Live Day Ahead: Refreshing Resilience Introduces New Possibilities

The day is young, but the fact that we're starting out with much of yesterday's "flash" rally intact means that new doors are opening for bonds.  

Next week's central bank announcements are--well... central to any assessment of near term possibilities.  Because we have the Fed and ECB back-to-back, and because the Fed's announcement will include an update to the economic projections (one of the biggest market movers we have), there's a wide range of potential outcomes.  

A wide range of potential outcomes tends to promote a sideways range-trade leading up to whatever it is that might cause the outcome.  It was with that in mind that we began talking about a return to the 2.94-3.04% range earlier this week.  But then yesterday's "flash" rally suggested there might be some imbalances in the landscape of trading positions, or perhaps even a stronger contingent of buyers as yields approached 3.0%.  

The net effect is that the near-term range outlook may be shifting from that 2.94-3.04% to something that is more focused on 2.94% as a center (as opposed to a lower boundary).  See the "central" possibility in the white dotted line below.  The slightly better case would be the green dotted line where 2.94% becomes more of a ceiling.

In any event, we wouldn't expect such narrow ranges to persist after next week's central bank announcements.  And in fact, we might not even be entertaining these same outcomes by the time we see how the rest of today goes.  There are no significant economic reports or events on tap, so traders will be left to prepare for the Treasury auctions and CPI data that kick off next week's festivities.  If those preparations DON'T involve pushing yields up and over 2.94%, it could be taken as another positive sign about next week's chances.