Yesterday's rally was a potential game changer for the "great push back" of 2017.  That's not the official term for the past several months of general positivity in bond markets, but the underlying phenomenon is as official as it gets.  

Simply put, this was an underdog year for rates.  Over the 2016 winter holiday season, the families of market participants are blessed (and sometimes lulled to sleep) by egg-nog-fueled pontification on the real fate of rates in the coming year.  Back then, more of us were entertaining the possibility that we really were in the midst of the great shift toward higher yields after more than 3 decades spent rallying back from the high yields of the early 80's.  

If you've heard me talk about this before, you know that I don't think there's a snowball's chance of rates making it even a third of the way back to 1981 levels in our lifetimes.  The natural state of longer-term rates (let's use 10yr yields, shall we?) is historically 2-4% with just one aberrant spike in 1981.  Of course there was some ramp up to that spike.  

The average white-haired market participant was in their formative market-watching years when that happened (and kudos to you if you're over 59 with no white hair).  It's burned into the old guard's memory as "something that bond markets can do."  Even market watchers who were coming of age in the late 80's and early 90's still had that past precedent very close at hand when looking at historical charts.  Point being: the notion that rates could go that high and be that high was inculcated for a long time.

After more than 3 decades of linear rallying, we begin to see things for what they were.

The only real question is whether yields continue trending lower or whether we've entered a period where they'll move sideways in a historically low range (let's call it 1-3% for now) or whether they'll maintain some form of rally trend--even if the pact cools a bit--following the example of other 10yr yields that have briefly dipped into negative territory on several occasions.

One thing is certain, in the bigger picture, we're certainly not even remotely close to being able to label 2017 as any sort of "great push back."  In reality, we'd need to see several years of "push back" before getting too concerned in the first place.  As it stands the past 4 years have been nothing compared to eerie persistence of selling pressure that began in 2003.  That's really the only valid post-1981 example of a bounce that looked like something other than a corrective spike.

As the chart above shows, we haven't even broken above the inner trend channel (where most of the ceiling bounces have occurred since 2008).  Moreover, there's still a chance that 2017 will prove to be a year where yields will bounce on that inner trend channel ceiling (and thus never even threaten to run to the upper red line).  

We're in the process of deciding the fate of that bounce now.  Breaking and holding below key technical levels will be important in deciding whether or not that happens.  One of the most important levels has been the 2.15-2.17 gap that we've discussed rather frequently of late.  After a bit of overnight weakness, 10yr yields find themselves smack in the middle of that gap, reeling (relatively) from a failed attempt to break through the next technical zone (2.10-2.12, as discussed for several weeks now in the on MBS Live).  There are other technicals in the vicinity as well, including the middle Bollinger band (21-day moving average), or the 252-day moving average discussed 2 weeks ago in this post.

The point is that we won't have the luxury of "only green days" even if bonds are ultimately carving out a decent longer term trend.  The entire premise of that 252-day moving average commentary ("1 yr" moving avg in the chart above) was that yields don't treat these levels like hard and fast lines in the sand.  They're more like sources of gravity, around which rates orbit for a while before moving through.  

It's when yields break away from that orbit that the game is truly afoot.  At the moment, yields are very much still IN orbit.  If they begin to break higher from any of the technical levels in the chart above, we can get increasingly defensive (and logically, we should).  But at this point, we're not even back in line with Monday or Tuesday's levels.  I'd want to see that before I'd even consider giving up on the current downtrend.

Bottom line: today is shaping up to be a red day in the midst of a broader downtrend.  That may mean locking at a loss for less risk-tolerant clients.  More risk-tolerant clients shouldn't be too scared until/unless we're definitively breaking above 2.21/2.22%.  The most risk-tolerant clients with the longest time horizons won't even need to start paying attention until yields are over 2.30.