To buy the dip or not to buy the dip (in bond prices).  That is the question faced by traders today as 10yr yields hit the 1.70% technical level in after hours trading yesterday.  This potential technical support coincides with the upper boundary of the ongoing trend channel.  The day begins with a decent bounce from that level, but we should probably avoid getting too excited about it just yet.  

20211022 open4.png

Bonds have bigger things to think about than modest technical bounces at long-term highs.  While that sort of bounce can inform decent short-term momentum, the overall trend will continue to be dictated by big-ticket items like covid, inflation, Fed rate hike expectations,  and curve trading (all of which are intertwined to a large extent).

The case count narrative is well known:

20211022 open5.png

Inflation expectations haven't gotten as much air time, but they're playing a big role in the rising rate trend.  Not only does inflation have a direct implication for bond valuations, it also pulls Fed rate hike expectations forward--something that's happened rapidly in the past few weeks.

20211022 open1.png

In the bigger picture, this is having predictable impacts on curve trading (betting among traders on which rates will move closer or farther apart).  Specifically, shorter-term yields are starting to rise much faster than longer term yields.  

20211022 open2.png

When this happens, it is historically a prelude to a reversal in longer term rates.  Of course, the pattern may well be different due to the unique situation created by covid, but to whatever extent history repeats itself, the default path would look something like the hypothetical box added to the chart below (straight copy and paste from actual movement a few years back).

20211022 open24.png


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 2.5
102-05 : +0-05
Treasuries
10 YR
1.6660 : -0.0090
Pricing as of 10/22/21 10:04AMEST