Although economic data had some small role to play in yesterday’s strong bond market rally, the day was really all about geopolitical risk.  If we’ve learned anything about geopolitical risk as a market mover, it’s to not rely on it as a long term guidance giver.

Even after the risk merely levels off, markets usually bounce back.  Maybe not today, maybe not tomorrow…  Maybe not even soon, but on the other hand, it could be soon!  Point being: don’t take the newfound move of 10yr yields into the 2.4’s for granted.

Heck, we can’t even take the same low-rate pleasure in 2.4+ 10yr yields as we did in late may because MBS have been lagging Treasuries so much.  Thankfully though, that SHOULD put us in a better position going forward–one where MBS is more willing to keep pace with any additional rallies and less compelled to keep pace with Treasury weakness if we go the other direction.

If we do happen to turn a corner today or Monday, the implications are pretty depressing from a technical standpoint.  Such a bounce would not only end up contributing to a long term inflection range from 2.40 to 2.51, but it would also introduce new technical signals with longer term implications.

One of these would be a “bearish divergence” in RSI.  RSI, or the “Relative Strength Index” is one of the most popular momentum indicators around.  When its line is moving up or down, momentum is increasing in the direction of the movement.  When the line hits either horizontal level at 30 or 70 (it’s always 0-100), the security is overbought or oversold, which basically means it’s ripe for a correction as soon as it crosses back over the horizontal line heading the other direction.

A bearish divergence occurs when momentum is telling a different story than the charted security–in this case, 10yr yields.  Note in the chart below that (IF we bounce higher in yield soon) that yields will have bounced at lower lows than those seen in late June, yet the RSI line will be bouncing at higher lows.  The conclusion is that underlying momentum doesn’t support the the increasingly aggressive rally.

2014-7-17 tsy techs

Keep in mind, that’s just one technical study.  It wouldn’t necessarily doom rates to a an epic sell-off.  But it does serve as a reminder of the ephemeral nature of geopolitically-motivated rallies, and would be one more mark against the sustainability of current levels.

Whether or not things play out in this manner remains to be seen.  Markets are essentially reduced to headline watching today as the event calendar is light.  One thing to keep in mind is that geopolitical risk often undergoes significant change over the weekend, so it’s less safe than normal to assume Monday’s rates will be close enough to Friday’s.

That’s a double-edged sword though.  A bigger flare up in risk could make for bigger improvements.  Simply put: more risk, more reward when it comes to floating, but if recent history and technicals are an indication, “risk” is probably still edging out reward if the rally doesn’t continue in spades today.