MBS Live Week Ahead: Friendly Bounce Basically Guaranteed, But Size and Duration Remain to be Seen

There were spooky stories told around bond market campfires late last week.  The monster in those stories was the looming specter of the Treasury auction cycle in the week ahead.  Another slate of record supply... and on a week where congress made real progress on the $1.9 trillion covid relief bill (something that only makes Treasury supply scarier).  Add record high stock prices to the mix and it promised to be a challenging week ahead for bonds. 

So far, the stories seem to have merit as 10yr yields hit the highest levels in almost a year overnight.  On the bright side, the losses have been minimal, and there's a solid chance at a corrective bounce at some point in the next 3 days.  One of the reasons for the nature of the auction cycle.  Traders tend to be better sellers of bonds heading into an auction cycle--all other things being equal.  Of course, that doesn't always guarantee a friendly bounce, but in the current case, it coincides with a technical cue that makes a bounce more likely. 

Simply put, we've seen so many consecutive "red days" that a green day is increasingly inevitable.  Moreover, that bounce could coincide with the upper limits of the trend channel (yellow lines below).  The net effect could be positive momentum that lasts for more than a few hours.  If the overall trend continues to hold, the gains could last for more than a few days.  Bottom line: some sort of supportive bounce is just about a guarantee.  Size and duration are the variables.