MBS Live Week Ahead: Late-March Rally May be Over, But What's Next?

In terms of directional movement, things have been great for bond markets since early November 2018.  Much of that greatness, however, felt more like a correction to the swift selling pressure seen in Nov/Oct.  Things didn't really get serious (in a good way) until March, which turned out to be one of only 2 months with a 30bp+ gain in 10yr yields since Trump was elected.

Even then, it wasn't until the last 8 days of March that the rally got serious.  This, of course, followed the Fed's somewhat surprising (in the sense that it was earlier and more aggressive than expected) announcement that it would phase out its balance sheet runoff starting in May.  Weak European economic data added to the move, and the following week (last week) saw bond buyers pile on to the momentum through Wednesday.  

But on Thursday and Friday, things began to change.  The correction that some analysts were calling for when yields broke below 2.44% was finally triggered by a move all the way down to 2.34%.  Today's opening weakness brings us back to 2.44%+ and raises the question of where we go from here.

As I mentioned a few times last week when the selling started to pick up (and once when we were still rallying), it wouldn't necessarily be a bad thing--let alone a surprise--to see yields retrace the rally all the way back to the scene of the initial breakout at 2.55%.  Granted, that wouldn't be good for rate sheets in the short term, but provided we didn't break much above that, it would bode well for a chance to see a deeper, more sustained rally.  It would also make it easier for lenders to keep pace with the market in terms of rate sheet improvements.

All that to say that we'll be watching for a return to one of the two main overhead ceilings if losses continue this week: 2.47 and 2.55 (and hoping to see a strong show of support at one of those levels).  The other option is for bonds to shake off the weakness today or tomorrow and then get back on the rally wagon.  Such a move would look eerily similar to the late-2018 move highlighted below as proof of concept.

Ultimately, it may not be technicals that determine what happens this week.  The slate of economic data is about as meaningful as it gets with both ISM reports, Retail Sales, Durable Goods, ADP, and of course, the big jobs report on Friday.