The beating in the bond market got real yesterday, with the 10 Year Treasury Note yield closing above its 200 day moving average. It was further exacerbated by mortgage bonds making a decisive break above their 100 DMA, making the technical picture exceptionally bleak. The price of bonds has been in a virtual free-fall since late September. Given the velocity of the move lower, it’s hard to say at what point the damage will stop. At this point, mortgage bonds have a long way still to go before hitting support of their 200 DMA and the 10 YTN has a clear path of continued destruction as well. As counterintuitive as it may sound, a Fed rate hike may be needed to help stop the damage.
At 11:00 am MST there will be a very important 10-Year Treasury Note Auction. With yields now higher, we may see a stronger demand as a result of the more attractive returns offered. However, if the increased return isn’t enough to attract a stronger level of demand it will be a confirming indication of underlying weakness in the bond market. A low demand will likely cause the yield on the 10 YTN to move closer to the 1.9% mark. Considering that just 8 short trading days ago the yield was below the 1.55% mark, this represents a significant move higher. We will have to wait and see how the results of the auction turn out.
With bonds under significant pressure, we will maintain our locking bias.