MBS Live Week Ahead: Light Data Week Leaves Focus Overseas

In addition to being a 4-day trading week due to yesterday's holiday, there's also a general lack of big-ticket economic data on tap.  In fact, there isn't a single report that qualifies as "top-tier" in terms of market movement potential and the only candidates that come close are the Markit PMIs on Friday.

That's unfortunate because the US bond market is desperately in need of some direction after almost half a year of broad consolidation and 1-3 months of intense consolidation.  "Broad" and "intense" are subjective terms, so let's quantify them quickly.  In the chart below, the broad consolidation isn't highlighted, but it would begin in the first 2 weeks of September, which marked a much smaller jump between highs/lows than the one seen during the month of August.  Each subsequent jump (higher or lower) has been smaller and has taken longer.  That's broad consolidation.

Intense consolidation, on the other hand, refers to the much narrower trading range of the past 3 months, the much higher frequency of bounces at highs/lows, and the linear regularity of those bounces.  This is especially noticeable in the past month as yields have descended from their last major ceiling bounce (teal line leading back from 1.95% ceiling).

Clearly, one of the two trends above (yellow and teal lines) will break shortly.  When that happens, it will provide only a modest cue about momentum in the bigger picture.  We're still waiting on a break above 1.95% (sustained, big) or a resurgence of positive momentum that takes yields well below 1.70%.  Until one of those things happens, bonds are best characterized as "sideways" and waiting for guidance.  

Apart from economic data, this week's other potential guidance can come from the European Central Bank announcement on Thursday morning as well as the market response to the spread and virulence of the coronavirus in China.  This may not seem like a typical market mover for bonds, but consider that the SARS outbreak in 2003 is largely credited with a drop of roughly 35bps in 10yr Treasury yields from Feb 19 through March 10.