MBS Live Day Ahead: Bullish and Bearish Cases For The Next Big Move

With yields touching the lowest levels in more than a month yesterday, there are two distinct cases to be made for the path ahead.  In the more pessimistic case, those low yield levels fall in line with the bottom of the range seen from late June through late July.  They coincide with technical indicators that are increasingly suggesting bonds are overbought (i.e. susceptible to bouncing off a floor/resistance level).

Optimists would be quick to point out that many a great little rally has begun with technicals prematurely suggesting resistance.  After all, technicals aren't magic tea leaves--just another way to consider possible future outcomes.  Especially clever optimists could also point out that other technical overlays could make entirely different cases.  

For instance, if we compare most of the first half of 2018 to the 4 months following the 2016 presidential election, we'd see yields surging toward long-term highs and then bouncing along sideways-to-slightly-higher lows.  In early 2017, there was a sense that such a consolidation was merely the market's way of catching its breath before another move higher in yields.  The same case could be made today. 

The outcome in 2017 was less terrifying than expected--and provided months of modestly lower rates before the tax bill took shape and kicked off the next big move higher.