MBS Live Recap: Eerily Calm Day; Any Meaning?

Today was one of those eerily calm days that we occasionally see plopped right where we'd expect to see something more exciting.  And in a way, that is exciting in and of itself!  

Yesterday, bonds officially broke higher in yield, up and out of their recent sideways range.  Rather, yesterday resoundingly confirmed that breakout, which technically began last Friday.  Either way, today's baseline role was to add to the weakness.  Instead, we saw modest weakness in the morning followed by enough strength to get bonds back to unchanged territory.

Days like today are seen by bond bulls as evidence that the bigger picture remains positive for rates.  They're seen by bond bears as a pure correction to newfound momentum.  We'll only know who's right with the benefit of hindsight, but I will say that past precedent suggests the pain of incorrectly siding with the bulls is greater than that of incorrectly siding with the bears. 

In other words, if this is evidence of a new rate ceiling at 2.95%, there's only a low probability that the next move is toward significantly lower rates.  On the other hand, if this is merely a temporary correction for the newfound negative momentum, there's a much higher probability that rates would rise enough to make you wish you did something about it sooner.  We may get a better sense of who's in control with tomorrow's 5yr Treasury auction, and certainly by the end of the week. 

Perhaps the most informative rally would be one that follows Thursday morning's European Central Bank announcement.  If that's the case, this weakness will look like a tactical set-up for post-ECB buying.  While I wouldn't rule that out, I also wouldn't count on it.