MBS Live Day Ahead: Last Day of Bonds' Best Month in 2018

Relative to the last 2 years of pain for bond markets, a sense of hope has emerged, seemingly overnight.  That has to do with the fact that bonds (as benchmarked by 10yr Treasury Yields in this case) have only just broken below an important floor as of yesterday morning.  In fact, that breakout wasn't confirmed until yesterday afternoon.  So yeah... it was basically overnight!

The floor in question is 3.05%.  Ever since yields crested that level in September, it's blocked all attempts to move back below.

But "hope" was in the works for several weeks before that.  Specifically, when stocks failed to break their own key level in early November, they sent the message that something might truly be amiss with the longstanding economic expansion.  Granted, it's far too soon to start looking out for anything as sinister as a bona fide recession, but it's not too soon to ask whether or not economic growth potential has peaked.

You might notice that bonds have been more willing to move lower in yield relative to stocks in November.  There are a few reasons for this.  First off, we have tanking oil prices (oil informs inflation, and declining inflation is good for rates).

Then there's the Powell effect.  This has to do with Powell's speech from Wednesday, which was taken as more dovish.  A dovish Fed helps both stocks and bonds, thus stocks have moved well off their recent lows even as bonds have continued to rally.

Jumping back up to the first chart above, we can keep an eye on 3.0% today in 10yr yields.  It has a decent chance to offer resistance.  If meaningfully broken (2.9997% wouldn't exactly count), we could see a flush of additional positive momentum from a short squeeze.  Keep in mind that such a rally would very likely see some push-back at the beginning of next week, and it would require further vetting from weak economic data throughout the week.  For now though, enjoy the last day of the best month for bonds in 2018.