MBS Day Ahead: No easy victories as bonds keep struggling to solve technical problems
1.62% was one of the key technical levels for 10-year returns last month. After breaking at the top last week, we had an opportunity yesterday to confirm a break again at the bottom and closed to close for a clear signal. The overnight weakness highlights the challenges facing a slight return below 1.62%, even if the situation is not as dire as it was a few days ago when the greater risk was a break above 1.75%.
To reiterate yesterday’s comment and the afternoon’s video, recent resilience does not confirm a friendly reversal towards lower yields, but suggests sideways momentum. Sideways momentum unfortunately means a healthy mix of stronger and weaker trading days. Better than where we were, but not as good as we’d like to be!
There are no significant economic reports. While PCE inflation was once considered a top-tier market driver, inflation reports have had a subdued impact on bonds since the pandemic. It is far more likely that trade will be affected by month-end / quarter-end rebalancing flows as well as technical data. With that in mind, 1.62% remains an important battlefield if it’s not already clear. 1.75% is likely safe from attack today, and 1.50% soil challenge is also unlikely. Bottom line: We are starting to feel a new sideways zone near long-term highs and we will have to wait at least until next week to see if the momentum stays largely sideways or gives way to a new directional move.