MBS Live Day Ahead: Bonds Filling The Post-Fed Breakout Gap

With 10yr yields beginning the day well over 2.50% and with 2.55% being the line in the sand marking the breakout from the sideways range at the beginning of 2019, it's fair to say that bonds have more or less "filled the gap."  This is a common conclusion/prediction among market technicians when a security makes a big move. 

In the most classic sense, the set-up requires a day of trading to have begun far enough away from the previous day's trading to create a "gap" in the chart.  This may have made more sense before overnight/futures trading became so prevalent, but these days, it's pretty tough for markets to create a gap when they're only ever offline for an hour or two per day.

It's more useful to consider gaps as being the trading range that is quickly traversed after a security makes a noticeable break from a previous trend.  For our purposes, let's focus on 10yr yields and the break from the narrow range (or "consolidation trend") that we were tracking in early 2019.  The bottom of that range rested on 2.55% and yields quickly put some distance between themselves and that floor during the late-March rally.  

The notion of "filling the gap" suggests that the 2.55% floor stands a decent chance to become a ceiling.  Rather, such a move would be a neutral baseline, and one that is probably slightly more common than the other eventualities (one being a rally that is so strong that it doesn't return to 2.55% any time soon and the other being a break back above 2.55%). 

The return to 2.55% might have seemed fairly unpleasant and unlikely when I mentioned it as a possibility on Friday (when yields were just over 2.4%), but here we are.  The good news is that there's still every opportunity for a ceiling bounce here.  The bad news is that such a bounce depends on data and events that may or may not go against us.  The early January precedent shows how yields could trickle slightly higher without getting significantly more threatening.  In that case, the floor had been 2.80%, and yields revisited that level twice as a ceiling before making their next move.