MBS Live Day Ahead: Range Breakout Continues But Additional Gains Aren't Guaranteed

Bonds finally broke out of one of their prevailing ranges yesterday as Wuhan virus fears reached a new level.  Some may roll their eyes at this sort of thing serving as the source of so much market movement, but it is what it is.  SARS pushed Hong Kong into a recession in 2003 and accounted for a 30bp drop in US 10yr yields.  That was a type of coronavirus.  Wuhan is a new strain of coronavirus.  People and markets are all doing the math.  Commerce is unavoidably being affected and markets are merely accounting for that.

Health authorities are working on a vaccine, and beyond that, at some point (presumably) the spread of the disease will cease to be exponential.  If the vaccine is effective and incidence declines, much of the recent rally momentum could be erased because a portion of it relies on fear of additional negative developments in the future.  But the other portion is simply due to the adjustment in the level of commerce mentioned above.  It's hard to say how much of the recent rally owes itself to which portion, but we do know the key level to watch in assessing broader bond market momentum.

1.67% in 10yr yields is the perfect dividing line that served as the floor of the range for the past 3+ months.  Remaining below that level in the coming days (and weeks?) would help redefine the expected trend of 2020 which, until the Iran flare-up and the coronavirus outbreak, had been pointed toward higher rates.

Today's data is moderately relevant with Durable Goods being the only bigger-ticket report.  Defense spending surged, but other spending did not.  Combined with revisions to last month's numbers, the report was mostly a wash and is having essentially zero impact on trading this morning.  This leaves markets free to trade the technicals and react to additional Wuhan headlines.