For some reason, I feel like the 2nd half of 2019 has been one of the most legitimately uncertain eras of bond trading in the post-crisis market environment.  That would make sense given the unprecedented combination of all-time high stocks, long-term lows in bond yields, the leveling off of the first round of Fed rate hikes in years, all against the backdrop of global trade-related uncertainty.  

Wait a minute... that's not unprecedented at all.  It sounds an awful lot like the mid 90's.   Stocks at all time highs?  Check.  Bond yields just bouncing after a big long rally that nearly saw yields hit the previous generational lows?  Check.  Fed Funds Rate cut 3 times after a being hiked more than 2.0% in the previous cycle?  Check.  New trade policies creating uncertainty?  Check.

20191104 opn3

To be fair, the timing of events with respect to trade was a bit different in the 90s.  It was actually the signing of NAFTA that preceded the Fed rate hike cycle and the huge sell-off in bonds in 1994.  And it trade-related issues are more of a coincidence, when comparing the two time frames.  More relevant is the fact that the early 90's, like the late 2000's, saw one of the 3 great rate-cutting cycles of the decades-long bull market in bonds.  That was followed by one of the 3 great pauses in the Fed Funds Rate at generational lows.

In many ways, the snap back in yields and Fed Funds can be seen as a function of momentum.  With rates so low for so long, investors were understandably jumpy about  a big-picture reversal in momentum.  That was more of an issue in the 90s because it was really the first experience of its kind.  This time around, the bounce in rates was incredibly orderly by comparison.  It took a lot longer to unfold and hadn't covered nearly the distance in 2 years (2017 and 2018) that the 1994 sell-off covered all by itself.

Discrepancies aside, there's a good chance that the 1990's have something to teach us about this sort of super-big-picture momentum.  Specifically, in the more negative scenario for bonds, where a trade deal happens and economic data improves, the upside risk in yields would probably target levels about halfway between the 2018 peak and the recent lows (i.e. 2.35%) before the next big reversal and rally.  That sounds really awful right now, but keep 3 things in mind.  That's a worst-case scenario (or close to it).  It was only a 6 month move in 1996.  And it gave way to new long-term lows 18 months later.

The other lesson from the 90s is that uncertainty could be on the menu in a big way.  That 1996-1997 period  (which lines up with the next 2 years presently) was a big triangular consolidation pattern.  That means (to whatever extent history repeats itself) that the shorter-term triangles we've been following could give way to much bigger triangles.  But we'll cross those bridges when we come to them.  For now, the shorter-term triangles are all we have.

20191104 open

As the chart suggests, the current triangle (aka "consolidation pattern") is suggesting a more symmetrical consolidation around a mid-point of 1.73%.  Longer-term momentum looks like it has room to run, but past examples of similar momentum scenarios should serve as a warning that the apparent peak seen in the green/teal lines above does NOT necessarily guarantee a rally will follow.  Case in point:

20191104 open2

In terms of the data and events on tap this week, tomorrow's ISM Non-Manufacturing data is tremendously important--definitely the highlight of the week from a domestic econ data standpoint.  Trade-related headlines still have plenty of power to cause volatility, but bigger-picture momentum likely waits for a signing of the phase 1 deal.  Away from economic fundamentals, the week's Treasury auction cycle looks to be weighing on bonds already with traders not too eager to approach the auction with yields at the lowest levels in more than 3 weeks (as of the end of last week).  This means we have a chance to see a post-supply rally on Thursday afternoon if the somewhat inexplicable weakness continues for the next 3 days.


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
101-16 : -0-04
Treasuries
10 YR
1.7770 : +0.0490
Pricing as of 11/4/19 10:17AMEST

Tomorrow's Economic Calendar
Time Event Period Forecast Prior
Monday, Nov 04
9:45 ISM-New York index Oct 875.4
10:00 Factory orders mm (%) Sep -0.5 -0.1
Tuesday, Nov 05
10:00 ISM N-Mfg PMI * Oct 53.5 52.6
10:00 ISM N-Mfg Bus Act * Oct 55.0 55.2
13:00 3-Yr Note Auction (bl) 38
Wednesday, Nov 06
7:00 Mortgage Refinance Index w/e 2066.0
7:00 MBA Purchase Index w/e 247.2
8:30 Labor Costs Preliminary (%) Q3 2.2 2.6
13:00 10-yr Note Auction (bl)* 27
Thursday, Nov 07
8:30 Jobless Claims (k) w/e 215 218
13:00 30-Yr Bond Auction (bl)* 19
Friday, Nov 08
10:00 Wholesale inventories mm (%) Sep -0.3 -0.3
10:00 Consumer Sentiment Nov 95.8 95.5
10:00 5yr Inflation Outlook (%)* Nov 2.3
10:00 1yr Inflation Outlook (%)* Nov 2.5