Sharp Losses Offer a Reminder About The Range

We first began to discuss the prevailing rate narrative on May 24th, just after rates hit their lowest levels in more than a month, saying “in an environment where we expect a volatile, sideways range to take shape, stronger gains only increase the odds of a bounce.”  Those words (volatile, sideways range) have made numerous appearances since then, but it was today’s bounce that did the most to remind us that such ranges also have floors.  In fact, the initial quote above is now eerily appropriate.  Rates have had a great run–perhaps a little too great as of yesterday.  Today’s video discusses the logic behind the bounce as well as strategy considerations when it comes to locking/floating.

Econ Data / Events

ISM Services PMI –  55.3 vs 54.3 f’cast, 55.9 prev ISM Biz Activity – 56.1 vs 54.0 f’cast, 54.5 prev

Market Movement Recap

08:49 AM Initially flat in the overnight session, then stronger on the run-up to domestic trading hours.  10yr down 5.6bps at 2.762 and MBS up an eighth of a point.

10:05 AM Under pressure at the 9:30am NYSE open and additional selling after 10am ISM data.  10yr now up 2.4bps at 2.842.  MBS down roughly a quarter of a point. 

01:51 PM Weakest levels of the day ahead of Fed Minutes.  10yr up 8.2bps and MBS down half a point (4.5 coupons).

02:31 PM Additional weakness after Fed Minutes, but not for any conspicuous reason.  MBS have been distorted by illiquidity.  4.5 coupons are just over 5/8ths of a point weaker after accounting for liquidity issues. 

04:26 PM Bonds heading out right in line with the weakest levels of the day (MBS prices looked weaker at 2-230pm, but that was a product of illiquidity).  4.5 coupons are liquid now and trading exactly 3/4ths of a point lower.  10yr yields are up 11.2bps in yield at 2.93%