“Support” and “resistance” are two terms often thrown around in market analysis. They loosely refer to ceilings and floors respectively (as far as rates are concerned), but it’s slightly more complicated than that (as covered in our primer on MBS Live). The gist is that ceilings and floors can still be broken, but they represent levels where rates have been more likely to bounce vs break through.
With the past 2 days of sideways apathy, the 2.42% ceiling in 10yr yields was getting some potential affirmation. We needed to see how markets would move once the week’s bigger-ticket events came out. Investors were waiting for Yellen’s semi-annual congressional testimony for an indication that her tone had shifted in a similar fashion as several of her Fed colleagues. Her opening remarks (released at 8:30am) were enough to do the trick.
Yellen didn’t say anything remarkably new and different, but she did acknowledge that the Fed is very close to a neutral policy rate (i.e. not many more rate hikes needed). Her assessment of the economic outlook was slightly more downbeat and her acknowledgement that the Fed could foreseeably need to buy bonds again served as a reminder of what the Fed is thinking about (“how do we respond to the next downturn?”).
All of the above was enough for a nice rally in bonds immediately following the prepared remarks. This reinforces the supportive ceiling at 2.42%, but it also reminded us about the resistance at 2.30% (because that’s where the rally fizzled).