MBS Live Day Ahead: How The Range Expands

If you're just joining us, we've been talking quite a bit in recent weeks about a consolidation range/trend in the bond market.  This refers to a series of higher lows and lower highs resulting in a narrowing trading range--one that eventually runs out of room. 

When we started tracking this trend, the converging lines suggested bonds would need to make a decision before the end of February, but the confluence of big-ticket data and events didn't suggest a big breakout until halfway through March.  How would we reconcile that?

Like this:

Simply put, when a consolidating range is on course to consolidate too quickly, the baseline assumption is that we'll have to widen the trendlines a bit as certain days seemingly push the boundaries.  Tuesday and Wednesday of this week were such days.  The previous trendline (teal in the chart) was broken on those days.  But rather than assume that meant a huge surge of momentum toward even lower yields, the safer and smarter assumption is that the strength simply nudged the trendline into the position now seen with the lower yellow line.

With all of the above in mind, it's easy to reconcile the moderate weakness that we see so far this morning, even though there are fundamental reasons for it (China trade deal optimism).

Up next, we have the week's biggest glut of economic data, led by the not-seen-since-before-the-shutdown Durable Goods report.