The Week Ahead: Ultra Cautious Bond Rally Enters 4th Week. Can it Last?

The good news is that bond markets improved--albeit microscopically--during each of the past 3 weeks.  That's significant because before that 3-week period, there hadn't even been a single week of improvement in 2018.  The last time we saw more than 2 consecutive weeks of improvement was in September 2017.  Although it may not have taken rates very much lower, late February definitely (finally) delivered the much-anticipated "1st break" of the relentless uptrend in rates.

The bad news is that some of last week's resilience could have been driven by temporary factors.  One factor that we already covered had to do with short-covering (pun not originally intended, but in hindsight, it works).  This means that investors were betting on rates rising earlier in the week, but after rates fell to levels that threatened those bets, investors "covered" (by buying bonds).  All things being equal, short-covering is less of a solid foundation upon which to build a sustainable rally.

Other temporary factors include a rare 2-week break from the Treasury auction cycle (it begins again next week) as well as the Tariff announcement and European political uncertainty.  

As markets work through these temporary factors, we'll have a clearer picture of how the next confirmed trend might shape up for bonds.  Technical indicators suggest there's room to improve if bonds can get past floors at 2.83% and 2.795% in 10yr yields. 

2018-3-5 open

"So Matt, you're saying rates can go lower if they move lower?  Groundbreaking analysis!"  Yes, yes... but the point is that if we can break those technical levels, it would speak to a certain sustainability of the recent resilience.  If, on the other hand, we see another big bounce at 2.795% as we did last week, it would increasingly look like we've gone about as far as we can go for now.

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