As we discussed yesterday, the momentum that has been negative for benchmark Treasuries and production MBS coupons throughout February... may be shifting. 

MUST READ BACKGROUND CONTENT: Directional MBS Alert: Bond Market Builds Case for Lower Rates

We  remind though,  rates don't move lower as fast as they move higher. This shift won't be served up on a silver platter. A change of bias will take time to confirm. We will undoubtedly face pressure from bearish short sellers and profit takers along the way.  There will be periods of volatility and increased anxiety that will lead us to question the potential for further positive progress. Beware.

There are short term milestones that must be met if the recovery rally is to extend for mortgage rates. These inflection points and targets will be important pivots in the coming days and weeks.  Here's a look at some of the milestones from short to long term. 

3.50%, the first long term target has already been hit as can be seen in the shorter term chart below where 10yr yields broke their 2 week trend yesterday.  We are looking for 10s to confirm that breakout today.  There is a cluster of technical resistance between 3.46 and 3.48% also. So we would be watching for 3.46% to hold today, but wouldn't lose much sleep if it was broken as long as 3.48% held.

When and if that break lower is confirmed, the game gets more serious.

In our short term charts from January, we called attention to 3.42%.  Looking at a more medium term view now we see that same level is also indicated as important by converging trends.  A confirmed break of 3.46% must be followed by a move through 3.42%.  We would expect to see profit taking at this level. This will create more resistance.

If yields manage to get through the 3.42 level, what's next? A move through resistance at 3.42% (3.40 to 3.42% really) would imply a directional move toward 3.31% was possible.  Perhaps the most significant resistance will be experienced at here at 3.31%.   In terms of frequency, this was the dominant low yield of the previous range.  This is our mid-term target if the rally continues. 3.36% is a likely stopping point for profit takers on the way to 3.31%.

We see 101-28 as an important inflection point for FNCL 4.5s.  FNCL 4.5's above 101-28 would lead "Best Execution" back down to 4.875% on C30 paper.

As far as a shift in production coupons that would break the buydown barrier at 4.75%, that is a way's away. We need to see lenders hedging with 4.0 MBS coupons before it makes sense for borrowers to buydown note rates to 4.75%. We'll re-evaluate liquidity in the TBA MBS market if our 3.31% target is met. Until then...assume 4.875% is your mid-term "Best Execution" target.