On days like today directional debates run rampant over "what's happening" and "what's going to happen"  in the bond market. AQ saved me quite a bit of trouble by digging into the "why's."  It's short and sweet and good for the brain.  EXPLANATION

That leaves me to pick up the ball on the technical side of things. Specifically we must address this comment from AQ's post, "The two-day interest rate sell off has served to stall positive momentum in the bond market. Trading technicals are now NEUTRAL.  Once again before a major econ event, the market is prepared to move in either direction."

We could post all sorts of charts with all sorts of technical overlays or we could stick to our newest motto: K.I.S.S.

Keep It Simple Stupid sounds like a more succinct approach. We'll only need one chart.  How we got here....

  • Starting in late January, Bonds were under the influence of a decidedly bearish technical trading bias.
  • Bearish technicals were  however challenged by a "flight to safety", which eventually sparked a short covering rally aka  "squeeze".  This carried 10s through 3.56% resistance back toward 3.50%. This was a major inflection point in the recovery rally.
  • Bearish technicals were soon cancelled out and stock weakness helped carry interest rates back into the 3.42 to 3.50% range.  Best Ex C30 mortgage rates fell to 4.875%
  • From that point, trading technicals went sideways. The short-term momentum bias favored lower rates for a week or two, but trading technicals never confirmed a shift to the bull camp.
  • And now, after the last 24-hours,  the remaining  technical momentum we had going for us has been cancelled out. The technical bias is officially neutral again.

WOULDN'T YOU KNOW...just before a major economic event, trader's have returned benchmark 10-year yields right back to the middle of the recent range. Which just so happens to be the major inflection point we discussed above!

Plain and Simple:  Rates are set up to move in either direction with little resistance.  A jump back up to 3.70% in 10s would lead Bext Execution 30 year fixed mortgage rates back over 5.00% again. This we know is possible. A confirmation of the recent recovery rally would require a sustained break of 3.40% in 10s.    For Best Execution to improve from 4.875% to 4.75%, we'll at least need to see 10s break though 3.31% and move toward 3.17%. Assuming MBS spreads don't gap out in the process.