As the week comes to a close, we find bonds continuing to trickle toward the lower end of the range that has prevailed for nearly 3 months.  In terms of 10yr yields, the upper boundary is clearly established at 1.95%.  The lower boundary is slightly more open to interpretation, but in any event is somewhere between 1.69 and 1.71.

With yields moving down to 1.717% in the first hour this morning, it's time to ask ourselves if we're about to see another range bounce.  Frankly, the only reason we wouldn't see such a bounce at this point is that it's too obvious.  Econ data at home and abroad has been "OK" or better on average (especially in areas of concern like German manufacturing, which came out better than expected overnight).  We're not at war with Iran.  The coronavirus news cycle is showing its first signs of slowing.  Mnuchin mentioned decreasing spending yesterday (i.e. less Treasury issuance) and ruled out the previously discussed ultra long-term bond (i.e. less Treasury issuance, again).  And last but not least, the technical landscape is seemingly ripe for reversal.

20200124 open

With Treasury auctions and a Fed announcement next week, it would make almost too much sense for bonds to retreat back up into the yield range and wait for some actual motivation to make a serious move higher or lower.  The caveats are twofold, however.

First, when I say that sometimes obvious moves don't pan out because they're too obvious, that's really a thing.  If everyone else is looking at the same secret crop report, they no longer have a competitive trading advantage and will likely make more money taking the counter-intuitive position.  Beyond that, consider that the Treasury trend isn't exactly the MBS/Mortgage rate trend.  MBS have tightened nicely in the past month and a half.  Mortgage rates are well into their 3-month lows even as Treasuries aren't quite there yet.  The following chart shows Fannie/UMBS 3.0 prices (inverted, so they move like yields) versus Treasury yields.

20200124 open2