Calmly Holding Overnight Gains As Resistance Sets In
The overnight session marked something of a departure from last week's examples as European bond markets stayed relatively less volatile, encouraging US Treasuries to do the same. Japan was out on Holiday, precluding the normal start time for overnight Treasuries, but indirectly proved to be one of the main drivers of the subsequent move lower in yield. Japan is considering a $558 bln bond-buying initiative that would be targeted at foreign debt in order to keep the Yen at export-friendly levels. US Treasuries would be a major component of any eventual program, and with the majority political party backing the move, it's a possibility that markets seem to be taking seriously.
Beyond that the generally calm and well-contained nature of the overnight gains fails to suggest huge, direct "cause and effect" between events and headlines. That's not to say that events aren't contributing to movement, but everything has been more gradual. The fundamental and technical pictures appear balanced and their individual considerations appear to be viewed as more of a package deal, ALLOWING (rather than "suggesting") Treasuries drift calmly to lower yields overnight.
That brought 10yr yields in the door just under 1.84% and MBS at 104-14. Therein lie some clues to the technical picture and the apparent lack of desire to stampede into stronger territory. The first clue is that these levels are the best (or close to the best, considering February MBS Coupons) of the year. Treasuries were just over 1bp lower on January 2nd, but by the morning of January 3rd they'd seen their last hourly closing level below 1.84 until this morning. Additionally, 1.84% would be the lower end of a "zone" of yields that comprises a massively important inflection point for Treasuries (the higher end being the much-discussed 1.865%).
As such, there's a ample justification for things getting less decisive and more "grindy" at current levels. Even as stock markets fall 3-5 points in the S&P right now, bond markets look like they can't be bothered to participate in such things. We'd have to imagine that any further gains from here would either have to be motivated by a significant and unexpected headline, or face increasingly firm resistance as 10's approach the January 2nd lows at 1.8178.
10's are currently at 1.8395 and MBS are up 5 ticks on the day at 104-14 and have traded a narrow range down to 104-11 at their worst. Obama is scheduled for a news conference at 11:15am Eastern (topic unknown) and Bernanke speaks late this afternoon. The scheduled Fed buyback from 10:15-11:00 is the next informative event for bond markets on the otherwise data-free morning and as always, volatility is possible just after 11:00am.