MBS Live Day Ahead: Bonds Playing Defense Amid Slow Summer Backdrop

Yesterday saw the lightest Treasury volume of any full trading day so far this year.  That's no great surprise in July, as this tends to be the month that marks the true start of summertime absences among market participants.  If you've encountered the term "doldrums" before, that's what we're dealing with.  The doldrums used to be a much bigger deal back in the day before important trades could still be made from most vacation destinations.  But even now, there's still a palpable shift in the pace of trading, on average (there are isolated exceptions, but they tend to be big).

Bonds have been doing pretty well in June and early July, with a downtrend in yields since the week with the Fed and ECB announcements.  Muddying the waters a bit was the fact that the latest tariff announcement arrived at the end of that same week (the announcement that referred to last Friday's "official" start of the trade war).  This took the wind out of stocks' sails and probably helped bonds head back in the direction of the lower yields seen during the Italian political snafu in late May.  

Over the past 2.5 weeks, it looks like bonds may be feeling out the limit of their desire to rally.  Defined in numbers, that limit looks like 2.825% in terms of 10yr yields.  That's the scene of the big bounce back on June 27th, and it's been the most frequently visited floor since then.  Bonds look like they're reinforcing that floor (i.e. continuing higher after last Friday's bounce) to start the day.  If the weakness continues, keep an eye on 2.885%.  Breaking above would make additional selling more likely, but keep in mind that a modest, temporary break is a less reliable signal than, say, a move up and over 2.90% and no recovery tomorrow.