MBS Live Day Ahead: Bond Bears Asking Yet Again, Is Now a Good Time For a Breakout?

It was fun and easy to get caught up in (or spoiled by) the recent ultra-narrow range in the bond market.  The boundaries of that range were .62 and .72.  It lasted for roughly 2 months with one brief exception for a failed breakout attempt, which is nothing short of impressive for a range that narrow.  The broader range remained intact, with the aforementioned breakout attempt stopping at 0.79% in late August. 

That late August sell-off made 0.79% an important level because it reinforced previous behavior from early April and mid-June.  Simply put, there is no higher 10yr yield that's seen more bounces since bonds first settled into their post-covid range.  That was true even before the late-August bounce, actually.  So perhaps that bounce was simply a way for bond bears to ask if it was time to shift gears yet.

At the time, bond bulls answered with a resounding "go away!"  Bears listened, but ultimately returned in grand fashion 2 weeks ago.  At that point, the bulls on the other side of the door seemed much less eager to push yields back down.  Thus we find ourselves back in the same position much more quickly this time around. 

The keepers of the .79 ceiling can only stall for so long--or so it would seem given vastly higher prevalence of weakness vs strength in October.  If there's any consolation here it's that modest bond market weakness is an obvious enough short term position that we have to ask ourselves if it's "too obvious." 

In other words, it makes good sense for yields to drift higher ahead of an official stimulus announcement.  After the announcement, we'd probably get another pop of weakness before bond bulls see a long-term buying opportunity.  After all, in a world with Covid (and what many believe to be the permanent destruction of a certain portion of the labor market), a 10yr yields anywhere near 1% is a solid buying opportunity--even if it's motivated by range trading as opposed to buying and holding.

Bottom line: we need to continue to be on the lookout for a bit more weakness in general--especially if .79 is convincingly broken--all the while keeping in mind that short-term weakness  sets the stage for the next rally.  The only question is whether there's another major ceiling between .79 and .96.  If there is, we haven't seen it yet.