MBS Live Day Ahead: Brexit Strikes Back

Ah Brexit...  You thought you'd heard the last of it back in 2016?  No such luck.  Actually, it is a bit lucky to be hearing about it, at least as far as domestic rates are concerned.  Both in 2016 and in the past week, Brexit-related developments helped rates move lower.

The current iteration of Brexit drama is not anywhere near that of 2016 and neither is the market reaction.  That said, there certainly has been a market reaction.  Yesterday afternoon, that reaction was noticeable, but barely.  The overnight session brought an even bigger move in British currency (Pounds Sterling), and a more direct response in US bond markets.

Much like bonds' relationship with stocks, it will take quite a bit of drama in Sterling to motivate additional gains (at least if we're talking about gains that would result from Brexit-related updates.  I can't tell you whether or not we're likely to see additional Brexit drama, only that markets seemed to have positioned for it fairly quickly.  Sterling is nearly as low as it's likely to go without a complete breakdown in the Brexit process. 

That's important at the moment for two reasons.  First, it means we shouldn't expect much more help from this specific topic.  Second, to whatever extent we do get any help, yields are very close to a trendline that may govern the lower side of a consolidation trend heading into the end of 2018.  Keep in mind, this is just one option for bonds, but in the absence of strong motivation, such consolidations are often good bets.  If the lower line can be broken, it would be a strong signal about 2018's yield highs being behind us.