Before we talk about anything remotely negative for the bond market, let’s lay out some context. The technical ceiling in 10yr yields that we’ll be examining today is 0.73%. Yields have been within 10 tiny bps of that level every single day since mid August and they were as high as .95% in early June. In other words, we’re putting relatively insignificant market movement under a microscope. The perpetually low/sideways rates of the post-covid market environment force us to go to such extremes.
All that having been said, there will be a bigger move toward higher yields at some point. While that’s probably not what we’re seeing take shape here, it’s never a bad idea to consider risks on the road ahead–especially when things start deteriorating at the beginning of the month. We often see a shift in momentum with a new month when the previous one was fairly consistent with a certain theme.
September’s theme was definitely consistent. It took the 0.63-0.73 trading range to a new level of narrowness with the sideways-to-slightly stronger range marked by the yellow lines below. At the beginning of the week, I warned that the consolidation was out of room and that risks of a negative breakout were slightly higher simply because yields were closer to the bottom of the 0.63-0.73 range. In other words, we were operating under the assumption that the sideways range would persist until defeated and the more recent consolidation range would help us predict whether the next bounce would be at .73 or .63. While it’s not official yet, the market has quickly done its best to provide an answer.
Bottom line: this is just something to keep an eye on for now. If yields aren’t eagerly breaking above .73, then nothing has changed in the bigger picture. We can continue to generally disregard economic data in favor of more pressing matters such as additional rounds of fiscal stimulus, corporate bond issuance, covid vaccine progress, and the election. If there is an economic report with the power to suggest a token reaction today, it’s ISM PMI (manufacturing) at 10am, but when it comes to econ data having a clear and meaningful effect on bonds, we’ll believe it when we see it.
Bonus Chart: Yesterday’s fiscal stimulus headline effect:
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-10 : -0-03
0.7071 : +0.0301
|Pricing as of 10/1/20 9:22AMEST|
Tomorrow’s Economic Calendar