Now that bonds have broken through previous resistance levels (.58 in 10yr yields and 103.00 in 2.0 UMBS), what comes next? Rather than look for fast-paced follow-through, it would be enough of a victory to merely see bonds maintain these newly acquired levels. Today we'll discuss what those levels might look like and what we'd need to see for them to persist.
The key level for 10yr yields was (and perhaps still is) 0.58%. More than any other level, this marked the bottom of the coronavirus range, even though we'd seen yields move much lower on a single day (March 9th). There were several failed attempts to close below 0.58 in July until it finally gave way last week with Thursday and Friday easily confirming the breakout by maintaining intraday ranges that topped out at .56.
A few things can happen when technical levels are broken. Sometimes we see momentum accelerate in the direction of the breakout. Other times, the technical level serves as the market's cue to reverse the momentum. The case is a bit stronger for the "acceleration" option in this case, but we really have to ask ourselves how much lower rates might go and how quickly they'd get there. After all, Treasury issuance is going to be used to pay for stimulus measures.
Additionally, assuming we're one day able to restore the US economy to some semblance of its former self, 10yr yields in the 0.5% range are probably a bit low. Granted, it would take time for such a restoration to occur, but the bond market will start heading in that direction as soon as future probabilities come into sharper focus (e.g. due to the widespread distribution of a successful vaccine).
Between now and then, however, the trend is friendly. The teal lines below represent the current trend and it is probably a more relevant thing to watch instead of the horizontal technical levels.
As far as the week ahead is concerned, there are several bigger-ticket economic reports beginning with this morning's ISM Manufacturing PMI. But naturally, it's Friday's NFP at center stage. Or at least NFP reserves the right to be the biggest market mover at the beginning of any given month. I think markets will increasingly be willing to react to it from here on out after it passed without a trace last month. That said, I think that willingness won't probably show up until next month's report. This one is based on a survey that took place roughly 4 weeks ago now. Traders want to see how the labor market situation is evolving AFTER the initial extended unemployment benefits expired (just last week).
As for the mortgage market specifically, we don't have the same clearly-delineated trend in MBS prices. But we do have a comparable technical level at a price of 103 in UMBS 2.0 coupons. This was broken right out of the gate last Monday and prices were closer to 104 by the end of the week. We know 103 is all it takes for rates to be about as low as they are right now and that they've been mostly flat due to capacity constraints. That's a reassuring position for the average originator (and prospective mortgage borrower) to be in.