MBS Day Ahead: Only One More Thing to be Concerned About


With yesterday’s big rally out of the way (a correction to a correction in the yield curve, as discussed in yesterday’s close), the most logical implication is for bond markets to get back to a slow, narrow, sideways grind ahead of another extended holiday weekend (half day tomorrow and fully-closed on Monday).  But there’s a nefarious technical pattern hidden amidst this week’s positivity.

It has to do with simple trendlines and our free will.  As market watchers applying technical analysis (in addition to fundamental analysis, of course) to bond market movement, we have some latitude as to the placement of our trendlines.  Sometimes there’s really only one choice, but right now, there are two viable ways to draw the upper trendline for rates.  

One method–the one we’ve talked most about over the past few months–results in a consolidative trend.  That’s in the yellow lines below.  The other method results in a linear trend channel seen in the teal lines below.  

2017-12-28 open

As the chart suggests, if we use the linear trend channel, we’re good.  Yields are back inside those railroad tracks and we can assume a year-end drift that remains inside them.  If we use the consolidative trendlines, we just had an unfriendly bounce on what used to be a ceiling.  That sort of bounce typically precedes significant additional weakness, although it would be more of a concern if it weren’t the end of December.  All movement in the last 2-3 weeks of the year must be taken with a grain of salt.  It won’t necessarily have a bearing on early 2018’s trading.

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