Anyone who’s spent much time around MBS Live knows about our favorite mantra regarding predictions.  Specifically, they are for suckers–at least in the context of predicting future interest rate movement. Occasionally, though, there are conditions that result in somewhat reliable patterns or “paths of least resistance.” 
Any time the bond market has been rallying with regularity–especially when we see several successive days at the lowest yields in many weeks–and then encounters a big data flash point that prompts a sell-off (like last  week’s jobs report), the path of least resistance is to undergo a bit of a correction. Subsequently, that correction tends to show signs of leveling-off, as we noted yesterday afternoon. From there, the path of least resistance is a broadly sideways range trade as we wait for more meaningful data/events to make a case for a breakout.
Today’s supply of such events is still light even though it includes Fed Minutes and a 10yr Treasury auction (we don’t see either being up to the task of stoking any sort of large or sustainable momentum).

Last week’s overseas headlines raised questions about about a spillover from volatility in the Japanese bond market to US yields. At issue: attention-grabbing newswires regarding a surge in long-term Japanese yields. Now today, overnight headlines made for a decisive correction in Japanese yields–one that’s being credited for opening strength in Treasuries. Is it warranted?  Maybe… Whether it is or isn’t, the movement in Treasuries is insignificant  by comparison. Yields continue operating in the same range, although they are now arguably exiting the prevailing uptrend of the past few weeks.

As for the Japan effect, here’s the case being made for today:

That looks pretty compelling, but if we zoom out, we can see the much larger movements in JGBs (Japanese government bonds) having absolutely zero correlation with Treasuries. 

Bottom line: we’d take the Japan effect with a grain of salt–especially on a holiday-shortened week.

Recall 2 weeks ago that news of the incoming German Chancellor’s ambitions to massively increase debt/spending led to the end of the bond rally in the US that took 10yr yields from 4.55 to 4.15%. The resulting bounce in US Treasuries was limited to roughly 15bps.  Meanwhile, Germany’s equivalent 10yr yields spiked 3 times as much, with the March 5th being the worst day for German bonds since 1989 (fall of Berlin Wall). At the time, it wasn’t a given that the debt ceiling increase could pass muster in Germany’s constitutional court and parliament, but as of this morning, it’s a done deal. Thankfully, it seems markets already had this fully priced in.

Meanwhile, the US bond market’s consolidation continues in stunningly perfect fashion ahead of tomorrow’s Fed dot plot.

If you ask a technical analyst, the chart above is a classic consolidation (or triangle, pennant), and it carries one of several connotations. Some say they’re predictive, but the only reliable prediction is that such consolidations can’t last forever (after all, the white lines are about to converge). The Fed’s dot plot probably has the power to cause a breakout in one direction or the other, but incoming economic data would have to agree with the move if it’s to be sustained.