While there's no way to know how the day will wrap up for the MBS market, we know how it's starting out.  We also know how 4 of the past 5 days have started out (and wrapped up, for that matter): at all-time highs.  The following chart of 2.0 UMBS candlesticks shows the consolidation and resistance around the 103.00 level.  The breakout occurred last week, and resulted in a classic case of follow-through from a technical standpoint.

20200804 open2.png

Broader bond market trends have been more even-keeled even though we're also seeing what is effectively a record run in 10yr yields (throw out March 9th, and we're at record low yields on 3 out of the past 4 days including today).  Although we can place the past few months of movement in a linear trend channel, Treasuries--like MBS--consolidated in a lower volatility pattern 2 weeks ago before breaking out last week.

20200804 open.png

The momentum metrics at the bottom of the chart (slow stochastics) were at risk of confirming a reversal toward higher rates (if the lines had crossed back above the lower horizontal 30% level.  The gains of the past 2 weeks keep bonds in 'overbought' territory.  This doesn't really help us predict the future, but we can think of it like the stretching of a rubber band that tends to increase the odds of a move higher in rates the longer we remain under that bottom line.  

Should we worry about that? 

Yes and no.  Mid 2019 is an informative comparison.  Between May and July we spent even more time at overbought levels.  A relatively sharp spike in unfriendly momentum took yields just over 20bps higher over the course of a week.  2 weeks later, they were moving lower again.  If the same pattern were to play out here, it would suggest a move down to yields of .45%, roughly, a quick bounce up to .67%, some sideways movement around the .58% pivot point, and ultimately another quick drop to new all-time lows.

20200804 open3.png

Of course none of the above will be decided in a day--let alone today (no significant events on the calendar).  We're along for the ride at the moment, simply remaining vigilant in the event a big picture risk materializes.  It's hard to imagine what sort of singular event that could be.  Rather, we're looking for a collection of evidence arguing in favor of a big picture reversal in rates--even if it's only comparable to the reversal seen in September-December of 2019.  Some would say we've already seen a comparable reversal in March-June of 2020.


MBS Pricing Snapshot
Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.
MBS
UMBS 2.0
103-26 : +0-05
Treasuries
10 YR
0.5265 : -0.0365
Pricing as of 8/4/20 9:47AMEST