Very Restrained Bond Rally Considering The Data’s Implications

Today’s CPI data was hotly anticipated, to say the least, and it did a borderline heroic job of advocating for a huge drop in rates.  Not only did the core M/M number drop to an unrounded 0.065 (implies core annual inflation UNDER 1.0%) but shelter inflation dropped to the lowest levels since the start of the pandemic, roughly in line with the bottom of the pre-pandemic range.  Those ingredients would have allowed the market to cook up a much bigger rally than we saw today, even though we saw the 2nd biggest mortgage rate drop in 2024.  A slower pace is more sustainable.  Markets want to do things right this time.

Market Movement Recap

10:47 AM Immediate rally in response to CPI and mostly holding since then.  MBS up 3/8ths and 10yr down 10bps at 4.184.

02:03 PM modest pull-back after poorly received 30yr auction.  10yr still down 9.1bps at 4.195 and MBS still up more than quarter point.

03:42 PM MBS are still up 10 ticks (.31) in 5.5 coupons but down more than an eighth from mid-day highs.  10yr yields are still down nearly 9bps at 4.20, but that’s up from lows of 4.166.