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MBS Day Ahead: Too Soon For Hope?

January 31, 2018
by admin

The title is a trick question–at least if you’ve read almost anything else I’ve written in the recent past. If today is your first time though, welcome! Here’s what you missed:

We’re in an uptrend in bond yields until we’re no longer in that uptrend.

Yes, this sounds trite and perhaps meaningless, but it’s actually an important concept when it comes to following bond markets for the purposes of advising clients on lock/float strategy.

Understand beyond a shadow of a doubt that no one ever knows what will happen an hour, day, week, month from now in financial markets. Understand that if there were a way to know such things, someone else would take advantage of that inside information and it would no longer be of benefit to you. The future must be approached with generalities and with the goal being to most effectively manage the fallout from various potential outcomes.

We can’t say “rates will probably keep moving higher” or that “rates will bounce soon.” We can, however say “if rates do THIS, then it becomes more likely they’ll do THAT.” Such connections can be made between other variables as well (e.g. if this piece of data does THIS, then rates are more likely to do THAT”).

We can know certain things about markets with certainty only if they are already happening. With that in mind, we know that rates have been in an uptrend since mid-December and that attempts to break that uptrend have been unsuccessful. We also know those attempts have failed to take yields below key technical levels that have acted as ceilings throughout the uptrend.

With all of the above in mind, it’s better than a 50/50 guess to conclude we need to see rates break below those floors before we’d have our first substantive hints at a broader bounce. That doesn’t mean, however, that there aren’t less substantive hints. For example, candlestick formations will make today the 2nd straight “shooting star” (a longer tail that shoots up from the relatively smaller body of a candlestick amid an uptrend) if we manage to hold within a bp or two of yesterday’s close. If that happens, the shooting star formations combined with the oversold technicals would amount to one of those less substantive hints–in this case, that a reversal was more likely. We’ll know more about whether or not this is coming together based on how today’s trading goes.

2018-2-1 open

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