In the day just passed, traders focused on the yield curve--an opaque term that officially refers to the entire curve of bond yields versus bond duration, but that everyone unofficially agrees to be a reference to the 2yr vs 10yr spread unless otherwise specified (e.g. if I want to talk about the 3m vs 10yr curve or the 5yr vs 30yr curve, I have to say "3m/10yr curve" or "5s/30s" respectively.  The yield curve (we're back to 2s/10s now) is the thing that everyone is talking about with respect to "inversion" (when 2y yields are higher than 10s).  Yesterday was the first day where the curve was inverted by more than 2 bps for more than a few hours.  

In the day ahead, traders may begin to push back on yesterday's curve trades.  The -0.06% level provided firm resistance overnight, leaving an implied ceiling at -0.03%.  If that ceiling breaks, the curve may enter a bit of a correction.  Today's 5yr Treasury auction could serve as a cue that pushes traders one way or the other in that regard.  5s are currently the lowest-yielding coupon in the stack--overbought, if you will. Whether traders double down on 5yr demand or back off, we'll be able to see how the "wings" of that trade fare (reference to the term "butterfly" which is like a curve trade, but with 3 bonds instead of 2, where the "body" is bought/sold and the "wings" are traded in the opposite direction--i.e. buy 5s vs sell 2s/10s).  Long story short, whatever happens at the auction, 2s or 10s might get more love afterward, and that could provide clues as to the staying power of the current rally.

But do we even want the rally to continue?  Actually, not really.  The deeper the move in 10yr yields, the more damage done to the secondary mortgage market and MBS spreads.  We would much rather see things level-off.  Thankfully, that's exactly what's been happening recently.  In terms of daily 10yr candlesticks, we're seeing lower volatility and less progress.  Slow Stochastics (longer-term momentum indicator) have leveled off right in line with 'overbought' levels.  

2019-8-28 Open2

Weekly candlesticks offer another way to view the asymptotic approach to all-time lows.  This by no means implies a big-picture bounce (nor does it imply a continuation).  It only means we're leveling-off, much like we did in June/July.  

2019-8-28 Open

The key difference between June/July and now is that the overall rally is getting to be historically big. 

2019-8-28 Open3

To some, this would imply higher and higher risk of a bounce with each extension of the rally.  To be sure, that risk cannot be ruled out, but using 2011 as an example, if the current rally matched the performance, rates would be close to 1.0%.  That's not a prediction, just some evidence of what's possible.  


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
FNMA 3.0
101-26 : +0-02
Treasuries
10 YR
1.4540 : -0.0360
Pricing as of 8/28/19 9:16AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Wednesday, Aug 28
7:00 MBA Purchase Index w/e 243.8
7:00 Mortgage Refinance Index w/e 2754.7
13:00 5-Yr Note Auction (bl)* 41