Good Thursday AM,
It must be 5 o’clock somewhere, I’m gonna pretend that’s where I am starting… now. The 10-yr was a 1.50% and mortgage bonds were off 70bps as of an hour ago. If your clients are thinking rates are in the same place as they were two weeks ago, please send them the chart below. Technically, the FNMA 2.5 coupons are off 250bps and the 2.0 coupons are off 350bps. That’s a lot of cheddar.
From Matt Graham as I don’t have the stomach to write it myself…
It got much worse. Bond yields were up more than 8bps by the open with the 10-yr just a hair under 1.47%. It might be hard for traders to avoid ringing the 1.50% bell even if bonds manage to bounce today or in the next few days. The kicker is that the weakness lacks the sort of discrete, obvious headline/data motivations that make for satisfying levels of understanding. It continues to be a move driven by big-picture momentum, short-term stop-loss triggers, technicals, asset manager reallocations, month-end trading, convexity hedging, and other esoteric, behind-the-scenes factors.
From a purely technical perspective, the additional weakness was a risk based on the breakout of the longstanding trend channel last week (yellow lines below). The risk now is that traders will aggressively try to get yields up to 1.50%, not only because it’s a nice, round psychological level, but it also fulfills an “opening gap” from Feb 24th, 2020, when the covid rally really kicked into a new and higher gear.
The longer a sell-off lasts and the higher yields go, the more likely it becomes that we see a bounce. The only catch to that assessment is that it only applies in relative terms. In other words, we don’t know HOW probable the bounce was/is, only that more weakness increases the odds of strength at some point. The past 2 weeks suggest it’s a bad idea to bet too heavily (if at all) on said bounce.
My son, who loves theatre, is currently working on the play Annie. He would remind me the sun will come up tomorrow.
Please remain safe and healthy, make today great.
