MBS Live Day Ahead: Too Soon to Hope For Support?

This week began with a decisive breakout to higher yields in the bond market. Trump's comments on stimulus have been a key source of volatility although the Treasury auction process proved to be a relevant consideration yesterday (in fact, the auction marked the beginning of the sell-off in the afternoon).

Today begins with bonds trading in a relatively calm pattern with lighter volume and yields remaining under .79% (the technical ceiling we began tracking when it offered a bounce in late August).  All of the above is more impressive or at least potentially significant as it occurred in spite of upbeat Trump comments on fiscal stimulus earlier this morning. 

With all of the above in mind, it's fair to wonder if we have a chance to see a more supportive tone in bonds.  0.79% has generally proven to be supportive for the past 3 days.  A 4th day would build an even stronger case.  But we need to make it through the afternoon's 30yr bond auction with minimal damage and, most ideally, would need to see some more substantial progress back toward lower yields before getting our hopes up too much.

Regardless of the technical outcome in 10yr yields, there are a few caveats.  The ongoing "yeah but" is that MBS have been doing a great job outperforming longer-dated Treasuries.  Case in point, check out the following chart which compares MBS prices to 10yr Treasury PRICES (not yields). Pretty volatile and weaker for Treasuries vs ho-hum and slightly stronger for MBS.

The other consideration is that we have a 3-day weekend coming up.  These can result in seemingly random trading patterns that typically start on Thursday afternoon (assuming a Monday holiday).  In many cases, the prevailing trading positions can be closed.  In the case of the current week where those positions are clearly "shorts" in the bond market, this could create a false sense of hope (because short positions are closed with bond BUYING).