With modest overnight weakness and a small negative reaction to this morning’s headlines (ADP and Treasury issuance), bonds may be encountering some more resistance on their journey toward lower yields and higher prices. Is this a meaningful signal or just incidental consolidation? 

Here’s the quick answer: although there’s never any way to predict the future, there is more evidence for today’s weakness being a normal consolidation than a scary reversal signal.

Now let’s break it down.  Bonds have been doing quite well recently with both MBS and Treasuries making steady gains throughout the past 7 business days.  By yesterday, MBS had closed at all-time highs on 5 of the past 6 days, and 10yr yields pushed deeper into sustained record lows (“sustained” means I’m not counting March 9th, 2020).  All of that having been said, there’s no question that this week looks fundamentally different from last week.

The following chart of MBS 2.0 candlesticks shows that yesterday was the first down day for prices after last week’s exceptional strength.  The rightmost candlestick is today’s action so far.  If we were to close right now, we’d have two straight days of moderate weakness following a strong move.  

20200805 open2.png

Pretty much any time we see resistance after a rally, we have to ask ourselves how serious that resistance might be and what sort of corrective momentum it might suggest.  In other words, is the party over?

To rephrase the quick and dirty answer up top, if the party is over, there’s nothing about the current bond market movement that confirms that.  If anything, bonds look like they’re very much still inside an ongoing trend toward lower yields.  

The next chart of HOURLY 10yr Treasury yield candlesticks has multiple parallel lines.  We could make a similar chart with DAILY candlesticks that has only two lines, but doing things this way allows us to see more bounces (i.e. more times where yields were more likely to reverse course than to break through any given line).  A true market technician (I only play one on the internet) would refer to only the yellow lines as the “trend channel” whereas the teal and white lines would be “internal trend lines.” 

I love internal trend lines!  They help confirm the validity of the broader trend and they help us evaluate the seriousness of risks to the trend.  In the current case, yields have only just moved above the mid-point of the trend this morning.  Moreover, the weakness could just as easily be blamed on a technical bounce at the lower teal line as anything else.  The more significant breakouts would be at the upper teal line, the upper yellow line, or 0.57%.

20200805 open.png

Bottom line (pun intended), we’re going to see a bit of weakness after strength.  That weakness CAN grow to be something that threatens the trend, and it’s not a terrible idea to prepare for that possibility whenever we see bonds take a break from a recent rally.  But we’d need to see quite a bit more weakness to confirm that the current trend is in trouble.

By Matthew Graham , dated 2020-08-05 09:31:30

Source link

Courtesy of Mortgage News Daily

Leave a Reply