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November 8, 2019

The Day Ahead: Lowered Expectations

Lowered Expectations
The Day Ahead | 9:10AM
By: Matthew Graham

If you don't expect anything good to happen for the bond market for the next few months, I guarantee you won't be disappointed.  If, however, you expect to see a normal amount of resilience and a continued willingness on the part of rates to operate with a 3% handle in the 30yr fixed mortgage world, I cannot make that same guarantee.

Grim stuff, I realize, but fortunes wax and wane when it comes to big-picture bond market momentum.  Fortunes waxed bigtime throughout 2019 and it increasingly looks like the bill is due.  If you're new to my commentary, this narrative has been in place since mid October when rates failed to make it back to September's lows.

All of the above having been said, I can't unequivocally guarantee that we've entered a new rising rate trend that will last at least another several months (here's why it would last that long).  The trade deal could still take a turn for the worse.  More importantly, global economic data could still slide for other reasons.  Or an unforeseen risk could emerge that rebalances the outlook for bonds more quickly than past precedent would suggest.  All I can tell you is that the risk that we've entered a rising rate trend for at least a few more months is bigger than the risk of any of that other stuff derailing such a trend.

1.90-1.94 remains an important zone, yes, but we also can't draw conclusions as firmly as we otherwise might due to the 3-day weekend.  The 3-day weekend means there's 50% more time between today's close and the next trading day in the US for trade headlines to have unexpected impacts, and traders could simply be that much more defensive until next Tuesday rolls around.  That's not something I would flat-out count on in terms of justifying floating over the weekend.  We're definitely in a lock-biased stance and have been since early October.  But it offers a glimmer of hope against an otherwise bleak short-term backdrop.

Lastly, here's yesterday's chart again, as I think it bears repeating for anyone who doesn't understand why I'm saying "at least several more months of weakness" is a baseline scenario.  Each of the highlighted sections shows what has happened after every big picture rally of more than 100bps in 10yr yields.

November 6, 2019

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