MBS Live Day Ahead: Short Squeeze Helping Bonds Push Boundaries

A short squeeze occurs when bond yields fall to levels that force short sellers to cover their positions (read more here, if that didn't make sense), and it's one of the key reasons that bonds occasionally rally in the absence of other justification.  This morning has seen just such a short squeeze, which is especially notable on the approach to a Treasury auction cycle.  That said, today brings the 3yr auction and 3yr notes are not rallying nearly as much as 10yr notes (which will be auctioned tomorrow).  As such, we may have seen the extent of today's rally right at the open (i.e. traders may be increasingly cautious on 10's as the auction approaches).

For now though, 10's are attempting to break below the consolidation pattern that's been intact since March.  The day is young and yields would need to close below the lower yellow line to even officially open that conversation (notice the failed attempt in early May, and the subsequent bounce).  At that point, they'd need remain below the line for at least another day, and preferably break below 1.53% to actually confirm a momentum shift.  That seems like a tall order, so as we advised last week, be ready to shift into a defensive stance if such a bounce begins to play out.