There’s a global pandemic. On the one hand, it seems to be improving. On the other, it’s responsible for a potentially permanent shift in the US labor market. On the one hand the federal government is spending trillions on stimulus, thereby putting upward pressure on rates due to supply and economic reflation. On the other hand, the Fed is spending trillions buying that supply (in addition to keeping short-term rates at zero).
No one knows exactly how this all plays out (understatement of the year), but markets know there are/were big enough and/or bad enough things in the immediate past/present/future to justify an all-time low trading range for longer-term bond yields. Questions about how long this range will persist and the exact boundaries will be answered by and by. In the meantime, all we can do from a rate strategy perspective (apart from attempt to predict the future) is to vigilantly watch the range/boundaries for signs of repetitive and unique behavior.
With that in mind, there is a new battle taking shape between a longer-standing contender in the “rate ceiling” division and a newcomer in the “floor” division. The veteran has quite a few more wins under its belt, but a notable loss in early June, and only one significant win in the past few weeks. The newcomer just won its first 3 fights.
If it’s not clear from the chart and the analogy, we’re talking about .73% as the veteran technical ceiling for 10yr yields and .622 as more recently relevant floor (i.e. the newcomer). As mortgage people (and general fans of low rates), our primary concern is a break above .73. In other words, failing to move below .622 isn’t as ominous as a decisive move above .73%. With yields currently trading around 0.70% we may be waiting until tomorrow’s Powell speech (910am ET) before seeing a legitimate challenge to this micro-range.
Either way, given that “micro” nature, the range isn’t likely to last very long–even if it lasts through this week. When it breaks, it will create another incremental piece of evidence that helps us define a bigger-picture trend.
As for today’s specific events, July econ data has already proven inconsequential as a market mover. The 5yr Treasury auction at 1pm has a better chance but it would have to go much better or worse than expected to get this market’s attention. Reason being, the weakness seen so far this week suggests a lack of concern for this round of auction supply (because it’s a shorter-term auction week and the damage has been in the longer end of the yield curve).
MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
103-00 : -0-01
0.7047 : +0.0227
|Pricing as of 8/26/20 9:56AMEST|
Tomorrow’s Economic Calendar