10yr yields attempted to break above their prevailing range yesterday.  As we discussed in the Day Ahead, it takes more than just an intraday move above a ceiling in order to confirm such a break is taking place.  Ultimately, yesterday's theme evolved into a resounding defense of the 2.88+ yield ceiling.  More simply put: yields briefly traded near 2.90% and then bounced lower with solid demand underlying the move.

As the top section of the following chart shows, today has seen yields hold right in the middle of the prevailing range.  If they remain fairly close to current levels, today will end up being an uneventful "punt" to next week.  Bonds will effectively be saying they're putting off bigger decisions for now.  In fact, they'd be putting off the comparatively small decision of breaking outside this narrow range.

The lower section of the chart alludes to the wild card potential for one of the periodic bounces in the yield curve to put upward pressure on 10yr yields.  The yield curve (green line in the chart) is the gap between 2 and 10yr yields.  The lower than line goes, the higher 2yr yields are compared to 10's.  This is also known as "curve flattening."  

Curve flattening has been a major theme and there's widespread anticipation of the yield curve hitting zero (aka "inversion") by the end of the year.  As the curve flattens, we've seen periodic corrections.  Bond traders often make curve trades as opposed to outright trades in individual securities.  If today's triple bottom (3rd day this week where the curve has bounced at the same long-term lows) results in a technical bounce, selling in 10yr yields could be one of the byproducts.  Whether that would be enough to take us back to the range ceiling remains to be seen, but it's certainly a possibility.

2018-7-20 open

MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
FNMA 4.0
101-31 : -0-03
10 YR
2.8637 : +0.0167
Pricing as of 7/20/18 9:23AMEST