MBS Live Day Ahead: Bonds On The Run?

Not to be confused with a band on the run, bonds find themselves in something of a similar predicament to the namesake of McCartney's post-Beatles single.  Specifically, both bonds and the band had been locked inside confined quarters, both had broken out, and both are "in trouble."  In the song version, the band escapes into the night, never to be found.  The market version is still playing out.

The "confined quarters" in question would be the recent prevailing range in 10yr yields (2.825-2.885%), which had been intact since 6/27.  Last Thursday saw a quick test of that ceiling followed by a decent rally that reinforced the range.  Friday cast some doubt again as yields rose back above the 2.885% ceiling, leaving the final verdict for today's trading.  The week begins with that verdict looking not so good.

As the chart suggests, most of our baseline technicals are giving negative signals.  The middle yellow line (Bollinger Bands or simply a 21-day exponential moving average) is now more convincingly broken.  Fast stochastics notched higher toward their upper 'oversold' line (but notably, haven't become so oversold as to imply value buying in bonds), and slow stochastics rejoined their previously negative trend with plenty of room to run (toward higher yields).

Whether or not we indeed see a run to higher yields remains to be seen.  At the very least, the technicals suggest that's a possibility for the remainder of the week.  If it happens, it's not a given that it would be due to economic data and events as this week's calendar is fairly light until Thursday when we get an announcement from the European Central Bank (ECB) and June's Durable Goods data.  Friday morning brings the first release of Q2 GDP, which is expected to come in just over 4%.