Pleasantly Flat For A 'Day Before NFP.' Technical Challenges
We had a good thing going... There was a nice technical surge in volatility beginning with yesterday's overnight session. Until then, using 10yr yields as a benchmark for broader 'bond market' trends, we'd been doing a fair enough job of holding under 2% with 7 separate hours finding a supportive ceiling there.
That changed in the overnight session between Tuesday and Wednesday, with volatility clearly increasing. Whereas yields edged up in a tight pattern over 3 hours heading into 2% on Tuesday afternoon, the break to 2.02 in the Asian session took only 30 minutes.
Things continued to be "spiky" from there with additional weakness in the European session taking 10's almost to 2.04 before the big GDP headline miss provided a brief correction to 1.974 as the lowest intraday tic in 10yr yields. We've seen these 1.97+ levels come into play quite a lot since the beginning of the year when January's NFP made for a pop to 1.976 up from previous highs near 1.92. Before yesterday, it also got some air time as a pivot point on Monday and Tuesday.
And now this morning, 1.97 has turned away an otherwise amicable bond market rally. The more optimistic scenario would have been to see something closer to 1.95 in order to establish a more balanced indecision heading into NFP tomorrow. The day is young, however, and it's not out of the question.
In the case that we revisit 1.97, a break lower would be a moderately reassuring technical development, though without an unexpected source of motivation, 1.95 would likely be a challenge. On the weaker side of the coin, we've thus far found support at yesterday's closing levels, but both MBS and Treasuries are right back on that doorstep.
To bring this all back to MBS, the 1.97 level in Treasuries would equate roughly with 103-14. The rejection brings us back to 103-09 at the moment, just 1 tick higher than yesterday's close. at 1.9867, 10yr yields are similarly close to their latest levels yesterday at 1.992. Between there and 1.972 sets up the short term range.
As of now, we look like we're set to test the weak side of the range, with perhaps the 9:45 Chicago PMI helping to nudge us over the edge or back toward more equivocal safety. Either way, we've thus far been pleasantly flat for the day before NFP.