MBS Live Day Ahead: Another Correction is Underway. How Long Will It Last?

Yesterday brought an abrupt confirmation of a bounce in bonds.  For 10yr Treasury yields, the scene of the bounce was 1.51% earlier in the week.  Multiple attempts to move lower failed, but yields stayed close enough to try for 4 straight days.  Things began to change on Wednesday as bonds began to weaken just slightly.  Even then, they day's weakest levels weren't any worse than those seen on the previous day.  It fell to yesterday, then, to not only break the little sideways range (1.51-1.59), but to crush it.

The bounce validates the bigger-picture consolidation trend seen below. 

There is room to run in terms of momentum/technicals.  In other words, bonds were just overbought, so they may shift back to being oversold, and they're not quite there yet--even in terms of fast stochastics (the short-term momentum referenced in the chart).  Once both short and long-term momentum indicators are back to 'oversold,' there would be more motivation for a friendly ceiling bounce.  Keep in mind though, these technical motivations are only ever part of overall motivation for a move, and they'll always be 2nd fiddle to any major fundamental or geopolitical developments.

If the consolidation pattern continues at the same pace as yesterday, it would imply a visit to the top of the pattern at 1.80%  Not to tempt fate, but there would need to be some substantial motivation from news/events for us to see a move that big today.  Even then, it would be fair to at least hope for--if not EXPECT--some support and indecision around the 1.75% technical level.

Today's market focus is on any trade-related developments out of Washington.  Unfortunately, the Trump/Liu meeting is not expected to take place until the end of the trading day.  Not only does that leave limited time for traders to react, but they'd be doing so in an illiquid pre-holiday-weekend environment.  The implication is that the move would either be bigger and more volatile due to that illiquidity, or simply that traders will guard against such a thing by preemptively selling before they take off for the 3-day weekend.