Bonds Weren’t Prepared For Fed’s Inflation Fears

If anything, you’d think the market would have been pricing in a hawkish Fed day, given the run up in energy prices. But Powell threw reporters a curve ball during the press conference and instead placed the focus on other categories of inflation that were under the microscope before the energy price spike (like core goods and non-housing services), saying there’d been less progress than hoped. The takeaway was that rate cuts are on hold for the foreseeable future. The market agrees, as it is now pricing the next rate cut at more than a year in the future. Bonds were already losing ground on oil price spikes (and PPI to a lesser extent). The net effect took yields back near recent highs and hit MBS for almost half a point.

Econ Data / Events

Core PPI m/m (Feb)

0.5% vs 0.3% f’cast, 0.8% prev

Core PPI y/y (Feb)

3.9% vs 3.7% f’cast, 3.6% prev

PPI m/m (Feb)

0.7% vs 0.3% f’cast, 0.5% prev

PPI y/y (Feb)

3.4% vs 2.9% f’cast, 2.9% prev

Market Movement Recap

08:32 AM Slightly weaker after PPI data. MBS unchanged after being up a few ticks and 10yr up .8bps at 4.207

09:16 AM additional weakness with oil prices spiking.  10yr up 2.8bps at 4.227 and MBS down more than an eighth of a point

02:12 PM modestly stronger after Fed announcement. MBS still down 3 ticks (.09) and 10yr up 1.5bps at 4.214

02:57 PM MBS are now down 9 ticks (.28) and 10yr up 5.3bps at 4.253

04:13 PM Weakest levels. MBS down nearly half a point and 10yr up 6.6bps at 4.266

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Sleepy Pre-Fed Day, But Slightly Stronger

Bonds did something they haven’t done in almost 3 weeks today. They closed at stronger levels for the second consecutive day. The last time that happened was February 27th at the end of the impressive month-long rally. While today was stronger, it wasn’t exactly impressive (or event that interesting). The most notable development was the fact that bonds rallied despite slightly higher oil prices. This is the opposite dynamic from certain moments last week where bonds underperformed a 1:1 correlation with oil. 

Econ Data / Events

NY Fed manufacturing

-0.2 vs 3.2 f’cast, 7.1 prev

Market Movement Recap

08:27 AM initially weaker overnight, then steadily stronger. MBS up 3 ticks (.09) and 10yr down 1bp at 4.21

12:32 PM Near best levels. MBS up 5 ticks (.16) and 10yr down 3bps at 4.19

02:48 PM Off best levels. MBS up 3 ticks (.09) and 10yr down 1.9bps at 4.20

It was a fairly uneventful day for mortgage rates, but also a fairly decent one. The underlying bond market made modest gains even without meaningful cues from oil prices. Lately, oil price volatility has been the most visible motivation for bonds and, thus, interest rates. After cresting 6.40% last week, the MND 30yr fixed rate index is back below 6.30% today, albeit just barely (6.29% for top tier 30yr fixed rates at the average lender). Looking ahead, tomorrow afternoon brings the latest Fed announcement. The market has conclusively decided there will be no rate cut. Even if the opposite were true, there would be no implication for mortgage rates (because the Fed doesn’t dictate mortgage rates). Nonetheless, Fed days can still cause volatility in rates, for better or worse. In tomorrow’s case, any impact from the Fed should be smaller than it otherwise would have been due to the market’s preoccupation with geopolitical influences.

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Until the end of the Iran war, bond traders are keeping oil prices on their screens and comparing oil price movement against bond market movement as the first task on the daily checklist. In so doing, we see a bit of outperformance on the part of bonds this morning. While there is solid directional correlation (i.e. yields and oil were moving in the same directions at the same times), bond yields are lower today while oil is still a bit higher. Surprisingly, today’s highest minute of volume happened with the 8:15am ADP data which showed its biggest drop in months. That said, there was not a big reaction in yields. The easiest conclusion for now is that bonds are taking some solace in an absence of big, new surges in oil prices as well as some supportive cues from the 4.30% bounce seen last Friday.